The Fed's as Confused as Everyone Else

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Apr 30, 2015 1:23:00 PM

and tagged In the News

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The FedReading over the statement from this week’s Federal Reserve meeting, it seems clear that the committee members are as confused as everyone else.

 The slowdown in the economy should be transitory. The fundamentals remain sound. Things should improve in the next couple of quarters. Employment fundamentals are not improving as much as we would like to see. And so forth.

A “wait and see” meeting

The Fed wants and intends to raise rates, but it remains scared to death (and rightly so) of acting prematurely and killing the recovery.

Lots of things that should be showing up soon—an acceleration in wage growth, a rise in consumer spending—aren’t happening. Although there are good reasons for that, and reasons to expect them to start happening soon, we don’t see them yet.

Keep an eye on wage growth

Over the past couple days, I’ve written about my expectations for the economy (and also how I could be proven wrong). Right now, I would argue that wage growth, over the next 12 months, is the one data point that will drive whether we see an upturn in growth or a continuation of the current slow but steady pace.

I believe the Fed is also watching wage growth closely, given its fairly dovish comments on the labor market, despite strong employment growth over the past year. This is the last piece of the puzzle that needs to fall into place—and it will drive consumer confidence, consumer spending, and ultimately business investment.

Watch the wage growth number, then, to see when the Fed will pull the trigger. June appears to be unlikely now, with September the best bet, but it largely depends on whether the Fed sees improvement in the labor market. At this point, that appears to mean wage growth.

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