The View | Wage growth is real indicator Fed should be watching
Some decades ago when I came onto the market as a fresh-faced young financial analyst, long on energy and short on knowledge, I was astounded by the vice-like grip in which a particular statistic could capture the markets. The magic number that first featured in my learning was “money supply”, with the market being consumed by M numbers; M1, M2, and M3.
Senior analysts would wait for the M1 figures to be announced for the previous month, dissect it in every possible way (or at least their 25-year old trainees would) and then pronounce with furrowed brow that we would have to wait for the next month’s M1 to be certain about which direction to follow. The pantomime went on for about a year and a half before the market decided enough was enough and entered a rally that had, in no way, been predicted, caused, or resulted from the M numbers.
This was of course in the age when money supply was believed to be a key determinant of the rampant inflation that had settled on the world and which had to be battled forever. Control money supply, through high interest rates - went the monetarist mantra - and you control inflation.
The figures that we need to concentrate on today are the growth in wages and consumer spending. It is the transfer of wealth to the mass of the population that...will drive the next stage of economic growth.
How times change; Monetarism has bought the farm. Money supply charts for the last six years look like a cat that has sat on a hot plate, while interest rates remain near zero, and raging inflation is merely a glowing ember. The interest rate tool is now not used to dampen inflation but to try to kickstart the economy. Indeed, it can no longer be used to control inflation (when it returns) because the world has too much public debt to pay off. Except Hong Kong, which sits on a huge cash pot that it won’t spend.
Economic figures are again keenly watched as the Federal Reserve Board has stated that the timing of the first interest rate rise will be “data dependent”. The problem is that the determining data keeps changing. After the 2008 financial crisis, it was economic growth as measured by the GDP figures, or the purchasing manager’s index (PMI). Then the key number became the speed of the recovery of the property market. Both of those picked up quite nicely in the first few years of the Fed’s near zero interest rate policy.
Nowadays, the big Fed focus is on employment. The Fed was rightly worried about a 9.6 per cent unemployment rate in 2010, but it is now 5.1 per cent. The number of employed people has never been higher and is up 8 million in four years. And yet the Fed is still worried about employment, conjuring up the spectre of low wage rises and low participation (those voluntary absent from work) as an excuse.