Did August Jobs Ready Fed for Sept. Rate Hike?

  • Earlier today we released the most important Non-Farm Payroll report ever, at least according to the media
  • A WSJ article stated that this report could “seal the deal” on rate hikes
  • Interest rates have been at zero for 7 years as the Fed contemplated lift-off
  • It all boiled down to one jobs report?
  • If the Fed were going to raise interest rates in 2 weeks, how can it count on its accuracy or the fact that numbers will change next month?
  • Let’s get into the numbers:
  • The number we got was 173,000 – well below the consensus forecast
  • One of the weaker components was private payrolls, which only grew by 140,000 vs and expected 211,000
  • The headline number is the unemployment drop to 5.1% – the lowest in the Obama presidency
  • Once again, the devil is in the details
  • The unemployment rate is falling because of the mass exodus from the labor force
  • Another 261,000 Americans left the labor force this month
  • The participation rate held steady at 62.6%
  • The lowest rate since 1977
  • I think it’s heading lower
  • The total number of persons not in the labor force rose to a new record: 94,031,000
  • Also this month another 158,000 Americans find themselves involuntarily employed part-time
  • That’s what’s responsible for the “improvement” in the labor numbers
  • Janet Yellen specifically wanted to an increase in labor force participation and more full-time jobs before contemplating raising rates
  • Those numbers have gone in the wrong direction
  • Why is nobody pointing this out?
  • This is the 9th month in a row that year-over-year factory orders have declined
  • The only other time that has happened is during recession
  • Every time we’ve seen a sharp decline in the market accompanied by an increase in the volatility index, the Fed has responded with Quantitative Easing
  • More and more people now do not believe the Fed will raise rates in September
  • If the Fed raises interest rates and the market keeps falling and the economy rolls over, the Fed loses a lot of credibility
  • This is affecting global markets
  • The Dow is now in correction
  • I pointed out in my last video blog that: a) the Fed has never raised interest rates from zero and b)normally the Fed raises interest rates into an accelerating economy
  • This time the Fed is raising interest rates when the economy is weakening
  • This time a rate hike will prick a much larger bubble
  • Even if the Fed raised rates to a quarter of a percent, that is still cheap money
  • The markets are forward-looking and they are not going to like what they see
  • The dollar strengthened on anticipation that the Fed will raise rates
  • America cannot afford higher interest rates on the debt we have now
  • One of the things most people overlook is the huge stockpile of U.Ss treasuries that are held abroad
  • Why do the emerging markets have so may dollars?
  • In the aftermath of the 1997 Asian economic crisis, they bought dollars as a reserve to defend their currency if it started to fall
  • That is happening
  • So now, foreign governments are going to start drawing on their reserves, selling treasuries to shore up their currencies
  • The vast majority of the accumulation happened after QE1, when we had a currency war
  • The media has labeled this sell-off “Quantitative Tightening”
  • China has already started to gradually sell treasuries
  • The Fed has promised not to roll over maturing treasuries and to shrink the $4.5 trillion balance sheet to about a trillion
  • That’s $3.5 trillion of Quantitative Tightening
  • Interest rates would have to rise dramatically to attract real buyers to U.S. treasuries
  • No one can afford higher rates, though
  • The Fed is not about to embark on rate-tightening now
  • How long is this game of chicken going to go on?
  • The market will continue to fall until the Fed admits it cannot raise rates
  • The inventory to sales ratio continues to climb, but declining manufacturing jobs is an indication that the sales are not there
  • Talk of rate hikes will go away and the reality of another round of quantitative easing is going to rear its ugly head
  • Again if the Fed raises rates slightly, it will cause the Fed to lose even more credibility
  • If we had a viable recovery the Fed would have raised rates years ago
  • The time is coming when it will be obvious that we checked into an economic policy roach motel, and we can never check out

Peter Schiff is an economist, financial broker/dealer, author, frequent guest on national news, and host of the Peter Schiff Show Podcast.

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