The Fed’s Next Move… Postponed Until December?

On August 26, the entire market was sitting on pins and needles waiting to see what Federal Reserve Chair Janet Yellen would say. Her annual speech at the Jackson Hole economic symposium in Wyoming was all anyone cared about—and for good reason. Given all the recent mixed messages from the Fed regarding the next interest-rate hike, investors were looking for more clues.

Well, Yellen’s message was clear. “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” she said.1

Yellen also said the labor market has been improving, despite recent weakness in GDP growth. “While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market,” she added.2

The market took those remarks as a sign that the Fed was getting ready to hike interest rates during its upcoming meeting on September 21, 2016.

During that August 26 speech, an increase in interest rates seemed all but certain. But then everything changed.

Will the Jobs Report Change the Fed’s Outlook?
See, during her speech at Jackson Hole, Yellen said something else that didn’t get much attention from the media. She was really vague on the timing of the next hike.

Instead of mentioning September as a possible date, she said: “Of course, our decisions always depend on the degree to which incoming data continues to confirm the committee’s outlook.”3

In other words, any weaker-than-expected economic data could change their outlook. And that’s exactly what happened, when the Labor Department released the August jobs report on September 2nd.

Economists were expecting a gain of 180,000 in August. But the U.S. economy added only 151,000 jobs instead. This wasn’t a total disaster. Still, it was lower than expectations. And a lot lower than the 271,000 jobs in June and the 275,000 jobs in July.4

The report also showed a slowdown in manufacturing hiring, which is another sign the economy may be slowing down. U.S. Labor Secretary Tom Perez explained the loss of jobs in the manufacturing area by saying, “The reality is that when you have a global economic slowdown and strong dollar…you’re going to sell less things and it’s reflected in the jobs numbers.”5

So the question now is: Was this data bad enough to delay the next interest rate hike?

It’s possible. Just look at what happened in May.

The Next Interest Rate Hike…Postponed Until December?
Back in May, Yellen said that a rate increase would be appropriate over the summer months.6 But when the May jobs report was released, it disappointed everyone.

The economy added just 38,000 jobs in May, much lower than the expected payroll growth of 162,000.7 As a result of the shockingly weak data, Yellen changed her mind, and the Fed never hiked rates in the summer.

Granted, the August jobs report wasn’t as bad as May’s. But it could be weak enough to cause the Fed to pause and wait for more economic data.

If the Fed doesn’t raise interest rates in September, it will have to wait until its next meeting in early November. But most market participants don’t expect the Fed to take any action in November because it seems unlikely the Fed will hike rates right before the U.S. presidential election. Given the political environment, the Fed could very well wait until its December meeting to make a move.

If that’s the case, we could see important market developments in the coming months. For example, a hike delay could be good news for gold and silver in the short-term. Lower rates are typically good for precious metals because metals pay no income to their holders. It’s easier for gold and silver to compete with yield-bearing assets when borrowing costs are low.

Just look at how precious metals reacted to the most recent disappointing jobs report. Silver hit a near 3-week high and gold rose to a session high.8 In recent weeks, precious metals had been moving lower because of expectations that an interest-rate increase could come as early as September.9 But now that a Fed move in September is far from certain, we could see a recovery in the metals.

Until the next Daily Pfennig® edition…

Mike Meyer
Vice President
EverBank World Markets, a division of EverBank