By Robert Stitt
Everybody wants job numbers (lower unemployment and more new jobs) to improve, right? Not exactly. When labor numbers improve, it means there are more people working and earning higher wages. More work and more wages equals more disposable cash in the marketplace. More cash in the marketplace leads to increased demand for products, which leads to increased prices. In short, improved job numbers precede increased inflation.
Once way to curb inflation is to raise interest rates. If people have to pay more to borrow money, this restricts disposable income and keeps inflation at bay. In theory. Higher interest also encourage savings as people earn more in “interest” when they keep their money in the bank, invest in CDs, money market accounts, and so forth. In-the-end, it has the same effect: less disposable cash in the marketplace, thus thwarting inflation.
Is that what is happening, now? Perhaps. The Federal Reserve will meet on September 16 and 17, and one of the main topics of discussion will be whether or not it is time to raise interest rates. One key indicator they will be looking at is the U.S. unemployment rate dropping from 5.3 percent to 5.1 percent. It doesn’t sound like much, but unemployment has not been this low since 2008. They will also note that there were 173,000 new jobs created, though that number is less than anticipated.
Should the Fed decide to raise the interest rates, don’t expect too much, too fast. Chief financial analyst at Bankrate.com, Greg McBride, believes, “Once the Fed starts, they’ll pause in between moves to assess the economy. The pace will be gradual, and the ultimate end points for interest rates will still be a lot lower than we’ve seen in past years.”
Many analysts are hoping the Fed sees the whole picture and not just a couple of indicators, but most in-the-know are not holding their breath for this to happen. To many, the writing is already on the wall as hints from the Fed’s voting members have potentially flashed their hand. One voting member, Jeffrey Lacker, said, “I am not arguing that the economy is perfect, but nor is it on the ropes, requiring zero interest rates to get it back into the ring. It’s time to align our monetary policy with the significant progress we have made.”
Two non-key indicators that the Fed likely won’t look at are black unemployment and black wage growth. Unemployment has dropped for most, but for African Americans, during this same time period, unemployment rose to 9.5 percent (almost double the rate for the rest of America). Wages for black workers also continue to lag behind their counterparts. While the increased interest rates may help African Americans who are focused on savings, those who need to borrow to survive are going to be hit twice as hard.