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JOLTS Boxes the Fed on Rate Policy

Posted by Joseph Trevisani on Sep 9, 2015 11:50:00 AM

Job openings in the U.S. rose to a record in July heightening the policy dilemma for the Federal Reserve as it contemplates hiking interest rates for the first time in eight years. 

Employers had 5.75 million unfilled positions, the highest number in the 15 year history of the JOLTS survey. The 430,000 increase over June was the largest monthly gain since April 2010 and the fourth biggest for the survey according to the Bureau of Labor Statistics today.

With the unemployment rate at 5.1 percent, the lowest in seven years and job creation averaging 225,000 a month for the past two and a half years, it would seem that the Fed's employment criteria for a strong and improving labor market are at hand regardless of August’s disappointing 173,000 non-farm payrolls.  

Despite the record number of job openings, the level of hiring fell slightly in July to 4.983 million, down from June's 5.182 million and  lower than last July's 5.003 million, perhaps indicating that the available pool of qualified employees is shrinking.  

But though the labor market appears to be robust, several factors may inhibit the FOMC from its stated intention to normalize U.S. interest rates. 

Job creation has been sturdy, but wages, the essential precursor to rising consumption have been stagnant for the past five years. Average hourly earnings were 2.2 percent higher on the year in August, just barely above the 2 percent average for the past five and a half years and little more than the 1.3 percent core PCE inflation rate in July, the price statistic  favored by the Fed, or its 1.5 percent average since December 2009.  

In addition, the unemployment rate of 5.1 percent is largely the product of people dropping out of the work force and no longer being counted as jobless. It is not because workers have found new jobs and returned to the income producing economy. The labor force participation rate fell to 62.6 percent in August, the lowest it has been in over 35 years and it has fallen steadily since the end of their recession in June 2009. 

Secondly the turmoil in equities worldwide over the last three months will likely be exacerbated by a Fed rate increase. 

In the U.S. the Dow is down 8.1 percent since January and 10.8 percent from its May peak. The S&P 500 is lower by 5.1 percent year to date and 5.8 percent from its top.

Today the Dow closed down 239 points at 16,252, over 400 points lower than its intra-day high and erasing the majority of yesterday's 383 point gain.

Many equity markets around the globe have been pummeled this year particularly in emerging markets. Some of the greatest losses are in China, where the Shanghai Composite is flat for the year but down 37.4 percent from the June peak. In Basil the Bovespa is down 6.3 percent since January and 20 percent. Overall the MSCI Emerging Markets Index is down 17.4 percent in nine months and 26.1 percent from the April apogee.   

In the United Kingdom the FTSE 100 has lost 5.1 percent year to date and 12.5 percent from April. In Germany the Dax is up 4.4 percent for the year but down 16.8 percent from the April high. 

As the economic intention of the Fed's zero rate policy and its several quantitative easing programs was to boost the equity markets, creating, through the so called wealth effect of higher equity prices, additional consumption that would support the economy until the recovery became self-sustaining, a rate hike now, especially with lower and volatile stock prices and markets around the world jittery from prolonged declines, is problematic at best.

The IMF and the World Bank have said that a U.S. rate hike should be delayed as the world economy is far too fragile and well known American economists Paul Krugman and Larry Summers agreed. 

The question which the Fed will have to answer next week it is not one they have been asking in public, though, given the governors stated desire to end zero rates, it is a question they clearly have been asking in private.

Are low interest rates and the distortions they induce in the economy now more of a problem than a solution?


Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

jolts sept 9

indu sept 9

msci sept 9

unem  etc sept 9

gdp fed funds sept 9


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