Janet Yellen sets jobs report floor at...100K?

Federal Reserve Chair Janet Yellen made an interesting comment yesterday on today’s jobs report, suggesting the economy just needs to add around 100K jobs a month to be okay. Via Reuters:

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“To simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month,” with anything above that helping “absorb” those who are unemployed, discouraged or had dropped out of the labor market, Yellen, who was speaking before Congress’ Joint Economic Committee, said in a question and answer session.

That 100K number is much, much lower than the current 200K monthly average for the entire year. It also seems odd for the Fed to set that little of a benchmark when the underemployment rate sits at 9.8%. But Zero Hedge points out this could be the excuse the Fed needs to raise interest rates.

The importance is actually quite simple: if the report is a solid beat, and if the Fed beats, that means that the stronger the economy, at least as measured by the jobs report, the steeper the rate of hikes will be, the more negative the impact on risk assets. Perhaps this is why so many sellside firms have been setting the stage for a “newer normal” in which a monthly increase of 100,000 jobs is actually warmly greeted by the Fed, even if in reality it means that the US economy is actually stagnating and barely covering the natural rate of growth.

That makes sense, because the Fed has been artificially keeping rates at almost zero since 2008. They’re going to have to go up at some point and Yellen certainly seems willing to raise rates. One thing USA Today notes is she’s still being pretty coy about whether it will happen.

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[ Yellen ] acknowledged that the Fed has been hesitant to raise rates because it can respond more easily to rising inflation — by pushing up rates more rapidly – than to negative shocks to the economy. The Fed’s key rate has been near zero since the 2008 financial crisis.

But she said that if the Fed waits too long, it might have to bump up rates abruptly, risking a recession. Keeping rates low for an extended period also “could encourage excessive risk-taking and thus undermine financial stability,” she said.

This doesn’t mean everyone is in favor of seeing rates go up. DoubleLine Capital’s Jeffrey Gundlach suggested last month rates need to say low due to worries of another recession. He’s even more concerned about the current conditions of the marketplace, and whether or not the economy can take a rate hike. Via etf.com:

Moreover, [ Gundlach ] was confounded by the fact that Fed officials are hung up on hiking rates now even though most financial conditions are worse than in September 2012, when the Fed eased monetary policy by embarking on a third round of quantitative easing.

There’s an even bigger question as to how much cash the Fed is going to have to pull out of the market through liquidity drain. Zero Hedge thinks it’s going to be $800B. If they’re right, these numbers are pretty freaking scary.

Putting that in context, QE2 – which pushed the S&P higher from November 2010 until June 2011 – was “only” $600 billion.

In other words, to “prove” to itself that it is in control and the economy is viable, the Fed will effectively conduct, via reverse repo, an overnight QE2…. only in reverse.

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This shows the problem of Fed’s involvement in the market in the first place, and it’s very unfortunate that only a few people are willing to point this out. The big issue is the fact economic theory is dominated by Keynesians who believe the government has to be involved. One reason why the government stays involved in the marketplace is the money. Peter Schiff wrote at Reason last year how the federal government has been able to bring in plenty of cash because the Fed has kept interest rates low. But Schiff notes the entire thing is basically just a way to help “the elite.”

Through its zero-interest-rate policy and direct asset purchases via quantitative easing, the Fed has lowered the cost of capital and raised prices for stocks, bonds, and real estate. In doing so, it has argued that rising asset prices create a “wealth effect” and are thus a key goal of its monetary policy.

Over the past five years, the prices of these financial assets have risen dramatically. However, unlike past periods of bull asset markets, these increases have not been accompanied by robust economic growth. To the contrary, the last five years have seen the slowest non-recession economic growth since the Great Depression.

This Fed-driven dynamic explains the rich-get-richer economy we’ve seen since the alleged recovery of 2009 began. The wealth effect has allowed the elites to push up prices for high-end consumer goods such as luxury real estate, fine art, wine, and collectible cars. But that is cold comfort to rank-and-file Americans struggling to find work in an otherwise stagnant economy.

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This is probably why some are flocking towards Bernie Sanders because of his focus on wealth inequality. But when the problem appears to be the government’s involvement in directing economic activity, you’d think more people would be willing to end the government’s role. The biggest question is how do you get the government out of the markets? Is it something which is going to take decades to undo, and anywhere between four to five presidential administrations? Or is it going to all change when the bubble eventually bursts and the markets crash? It’s got to happen, one way or the other. It just depends on what comes first.

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