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B.A. in economics and MBA from top 10 business school. I have over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, a youth mentorship program that teaches investment management skills and ... more

Powell Tells Congress Gradual Rate Hikes Are Needed

Date: Sunday, March 4, 2018 11:22 AM EST

Fed Chairman Jerome Powell

Last week Federal Reserve Chairman Jerome Powell submitted his semiannual monetary policy report to Congress. Mr. Powell convinced Congress the economy was not overheating, yet voiced there was still a need for gradual rate hikes. Financial markets were volatile on the strength of his comments. For the week the Dow Jones (DIA), S&P 500 (SPY) and the Nasdaq (QQQ) finished down 3%, 3%, and 2%, respectively. Below are highlights from Chairman Powell's comments and my interpretation.

Strong Jobs Growth

Chairman Powell

The U.S. economy grew at a solid pace over the second half of 2017 and into this year. Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January. This pace of job growth was sufficient to push the unemployment rate down to 4.1 percent, about 3/4 percentage point lower than a year earlier and the lowest level since December 2000. In addition, the labor force participation rate remained roughly unchanged, on net, as it has for the past several years--that is a sign of job market strength, given that retiring baby boomers are putting downward pressure on the participation rate. Strong job gains in recent years have led to widespread reductions in unemployment across the income spectrum and for all major demographic groups.

My Interpretation

The 200,000 jobs added in January confirmed the economy is at a fever pitch. It also appears to confirm that the Federal Reserve has done its job over the past decade by helping to create a wealth effect in stocks and keeping interest rates at record low levels. Construction, leisure & hospitality were particularly strong. Construction could stall in a rising interest rate environment. Leisure and hospitality could connote that jobs serving the wealthy - big beneficiaries of the Fed's wealth effect - are areas of growth.

A 4.1 percent unemployment rate suggests the economy is at or above full-employment and at risk of overheating. Powell's reference to the labor force participation rate was also telling. January's labor force participation rate of 62.7 percent has been flat over the past four years. Prior to that it had not been this consistently low since the late 1970s when President Carter was in office. If retiring baby boomers have hurt the metric then the low labor participation rate could potentially improve over time.

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