Why Yellen Must Hike Rates In March

Earlier this week Fed Chairwoman Janet Yellen delivered her Semi-annual Monetary Policy Report to Congress. Pundits expected the report to be business as usual ... maintain the course of low interest rates until the Fed's 2% inflation target was met or exceeded. Below is what she had to say and my interpretation:

Yellen On Tightening Labor Market

The economy has continued to make progress toward our dual-mandate objectives of maximum employment and price stability. In the labor market, job gains averaged 190,000 per month over the second half of 2016, and the number of jobs rose an additional 227,000 in January. Those gains bring the total increase in employment since its trough in early 2010 to nearly 16 million. In addition, the unemployment rate, which stood at 4.8 percent in January, is more than 5 percentage points lower than where it stood at its peak in 2010 and is now in line with the median of the Federal Open Market Committee (FOMC) participants' estimates of its longer-run normal level.

Author's Interpretation:

President Obama has been criticized for creating jobs with low wages like waiters and bartenders - the types of jobs that cater to the elite and their leisure activities. President Trump worked the country into a frenzy over the loss of high-paying manufacturing, jobs and the outsourcing of U.S. jobs to countries with lower wages. Nonetheless, the 4.8% unemployment rate was encouraging. The fact that the labor participation rate ticked up from 62.9% from 62.7% in December and 62.7% in the year earlier period was also big deal - such rates have not been this low since the late 1970s. If more people can return to the labor force in 2017 that could be a tremendous win for the economy.

Hourly earnings, formerly a sticking point for critics, was up 2.9% Y/Y. It was the fastest wage growth since 2009. The average work week ticked up 1% Y/Y, which helped drive weekly earnings up 3.8%. It was an excellent send off for President Obama and might have been enough for Yellen to hike rates.

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