Strong Jobs Growth Does Not Automatically Mean That The Federal Reserves Will Raise Short-Term Interest Rates

Today’s strong jobs report will continue to stoke the debate over when the Federal Reserve will raise short term interest rates. Both sides of the debate will find data points within the employment report that support their argument. I think that the point that gets lost in the noise of the debate is this:

• The fact that economic data has been varied enough to give each side of the interest rate debate sufficient data to support their arguments means that there is not an overwhelming trend in one direction or the other. The Federal Reserve wants a sustained trend before making their decision.

The Federal Reserve has been very clear that the decision about when to begin raising interest rates is data dependent. This includes a multitude of economic data, not just jobs growth or the unemployment rate. Consider this:

• Jobs growth and the unemployment rate are only two of the sixteen employment data points that the Federal Reserve monitors within the category of employment data.

The Federal Reserve has been clear that they want to see sustained improvement in the economic data. The Federal Reserve does not want to make the mistake that the Bank of Japan has made during their multi-decade of subpar economic growth. That mistake was raising interest rates before the Japanese economy was strong enough to absorb interest rate increases.

So far, the U.S. economic data has been inconsistent for the year. That is not consistent with the Federal Reserve’s desire for sustained improvement. The press releases and speeches from Federal Reserve representatives indicates their belief that the economy will begin to show the sustained improvement as the year progresses. If that occurs, then the start of interest rate increases will probably happen sometime in the second half of the year. If it does not occur, then the first interest rate increase could be pushed into next year.

If you are trying to determine when the Federal Reserve will begin raising interest rates, remember an old investment industry adage: the trend is your friend. Focus on the trend of results from the economic data releases and don’t focus on the headlines.

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