E Feds Move Goal Posts And Replace Football With Badminton Birdie

The Federal Reserve has not only moved the goal posts, they have exchanged the football for a badminton birdie. Under the Bernanke regime, several benchmarks were offered as significant to determining the next cycle of rising interest rates.  However, after the recent confab of world central bankers in Jackson Hole, not only have these benchmarks changed, some important ones have been totally discarded.  The two big changes are 1) what constitutes the unemployment rate and 2) tolerable inflation.

As interest rates were kept low, everyone knew that someday rates would increase, and justification for low rates were in consideration of an employment rate of 5.5% and higher and inflation at or below 2.0% annually.

As these benchmarks are close to being realized and with the Fed apparently not willing to begin the next cycle of interest rate movements, the widely used unemployment rate has been replaced by a “basket” of 19 labor measures.   Inflation rates have crept up to over the 2.0 target, but just not for the most recent 12-month period.

The problem is the unemployment rate was 6.2% in July and 3-month annualized inflation numbers stand at 2.8%.

The new unemployment benchmark is called the Labor Market Conditions Index (LMCI) and includes items such as the number of individuals quitting their job and a ratio of “jobs plentiful vs hard to get”.  This change makes Fed policy goals much more opaque, rather than their stated goal of being more transparent. 

Inflation has been creeping up over the past several quarters.  First Trust Advisors commentary recaps the most recent numbers:

“Consumer prices continued to move higher in July, though only at the tepid 0.1% pace the consensus expected. Although consumer prices are up a moderate 2% from a year ago, the year-over-year number masks an acceleration. The CPI is up at a 2.5% annual rate in the past six months and up at a 2.8% rate in the past three months. Since the start of 2014, consumer prices are up 2.4% at an annual rate versus the 1.2% pace in first seven months of 2013.”