Submitted by Chris Hamilton via Hambone's Stuff blog,
The Federal Reserve continues discussing the timing for a cycle of rate hikes and a return to "normal"... but I think there is more than ample evidence which points to exactly the opposite. Seems the adage "watch what they do...not what they say" is appropriate as ever. So where's the evidence?
1) FFR and Manufacturing Employment Growth Cycles
The chart below shows a 3yr moving average of the growth/decline in manufacturing jobs in the US vs. the same 3yr moving average of the Federal Funds Rate. Manufacturing job growth representing a proxy for business and economic expansion. Noteworthy are the blue arrows representing cycle peaks in manufacturing job creation all (except this present cycle) taking place during a rising rate environment and followed a couple years later by cycle interest rate peaks (dashed black arrows). This next round of rate cuts incented the next round of investment and manufacturing job growth. This has been a highly reliable indicator.
I draw your attention to the last blue arrow on the right of the chart. It doesn't seem to agree with the Fed that it's about time to start a rate hike cycle...in fact it seems historically to argue now is the point in time the Fed typically begins easing?!?
And a close-up since 1980...the pattern of rate cycle bottoms soon after corresponding with manufacturing job cycle tops is fairly plain (yellow dashed arrows). However, previously this was taking place during a rate hike cycle...but not this time.
Which seems to argue that the Fed is far more likely to start cutting interest rates (NIRP anyone?) than on the cusp of a rate hike cycle.
2) Fed Funds Rate and Shadow QE Rate
This rate cut rather than hike scenario seems to agree with the work done and posted on the Atlanta Fed's website (HERE) that QE was essentially the equivalent of negative interest rates (charted out below). This additional QE accommodation in addition to ZIRP peaked with negative 2.9% rates in early 2014. Upon the initiation of the taper of QE in early 2014, effectively the interest rate hike cycle began. And I suggest that the Fed's .25% hike early this year was the end of the hiking cycle...not the start.
This viewpoint finds significantly more evidence as one peruses the demographics of our situation...not the swelling ranks of old but the stalling young population, total employment among them, and full time employment (chart below).
3) Decelerating and Declining Core US Population and Employment
As of 2000, the 25-54yr/old segment of the US population made up 120 million persons and held approximately 75% of all jobs in the US. This critical core populations period of rapid growth from post WWII (and shown from 1980 in the chart below) ended just prior to the turn of the century. Since that time, the core group representing the vast majority of the US workforce (and the vitality of the US economy) has entirely stalled out. There are now 600k fewer total jobs among this core population segment than in 2000 (where this data set becomes available) with 500k of those representing declining full time jobs. However, the redline rocket shot in the chart below representing mortgage debt went ballistic in this same period. The Federal Reserve mandated interest rate cuts with the intention to substitute credit for declining numbers and quality of potential consumers and home buyers. The Fed simply no longer believed markets premised on supply and demand should determine prices...the Fed would determine the "correct" values and centrally impose policy to achieve these targets.
And what that looked like comparing the Federal Funds Rate vs. outstanding US mortgage debt. The sudden fall in mortgage debt starting in '08 corresponded to two contradictory inflections. 1) the implementation of ZIRP and the lowest mortgage rates in a lifetime, and 2) the peak of the 25-54yr/old population, employment, and full time jobs. The demographic peak and fall seemingly overwhelming the Fed's "free money"...but the crowding out of those typically looking at bonds for retirement income or foreigners looking for a "safe haven" found a new "home"; rental real estate but with a minimum 20% down-payment (and often fully in cash).
Below, a close-up of these variables since 2000. Difficult to imagine what a rate hike cycle beginning now would look like given the fact that the Fed's ZIRP policy couldn't induce any net new mortgage debt since its introduction.
4) Total Population Growth vs. Full Time Job Growth
Over the previous and current interest rate cycles (measured from peak to peak), the growth in total US population vs. the net new growth in full time jobs above and beyond the previous cycle employment peak (below). This cycle has only replaced the jobs lost during the downturn but has created no net new jobs...not typically a time to begin slowing the economy with rate hikes.
5) "Not in Labor Force"
And the big winner...the true growth engine of ZIRP and QE...the present explosion of those deemed "not in labor force" (below). Those deemed neither employed or "unemployed". Simply "other". This seems to be where nearly all the growth in the US population has gone over the current interest rate cycle.
6) Boooooomers
Lastly, please no proposing that the rise in "not in labor force" is solely due to the retiring boomers. The chart below outlines the rising 55+yr/old population, employment, and full time jobs among them. In fact since '00, all gains in full time employment have been among the 55+yr/olds simply offsetting the full time job loses seen among the 25-54yr/olds. The swelling elderly ranks filled with underfunded seniors who are running into stagflation (high rising costs absent rising COLA's). They are essentially left with the choice to continue working longer but in so doing are mortgaging the young adults future to fund their present. This essentially means there is a generational skip taking place...hollowing out the core populations finances and the economy so dependent on them.
Conclusion
Somehow, it seems the preponderance of evidence points to this being the typical timing the Fed chooses to initiate a new cycle of accommodation and rate cuts rather than the idea we are just starting a rate hike cycle.