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Takeaway: The U.S. labor market peaked in the first quarter of 2015. Raising rates into that is a bad idea.

Why a Fed Rate Hike On "Strong" Jobs Data Is A (Really) Bad Idea - rate hike cartoon 11.05.2015

The Federal Reserve is pinning its 2016 interest rate hike hopes on a strengthening U.S. labor market. We think that's a mistake. We've been warning that the jobs market is past peak and jobs growth will continue to slow.

Here's a look at the latest jobless claims data (as interpreted) by Reuters:

"The number of Americans filing for unemployment benefits unexpectedly fell last week to near a 43-year low, an indication of firmness in the labor market which may support an interest rate increase by the U.S. Federal Reserve this year."


we disagree with reuters' rosy interpretation.

Take a look at the chart below. It shows year-over-year growth in non-farm payrolls. As you can see, jobs growth peaked in 1Q15 and has rolled over ever since. (Once labor growth peaks, it doesn't come back... something to be aware of ahead of tomorrow's September jobs report.)

Why a Fed Rate Hike On "Strong" Jobs Data Is A (Really) Bad Idea - nfp 10 6

On The Macro Show this morning, Hedgeye CEO Keith McCullough responded to a subscriber's question about labor market strength. 

Is this time different? Will labor market strength remain? And will the Fed raise rates as a result?

He pulled up a chart from our latest Macro Themes deck. It shows a 6-month moving average of jobless claims. In a nutshell, what it shows is that jobless claims peak following the previous recession, and then roll over during expansion.

Once the data hits 300,000, it takes about 20 months before the next recession hits. In the current cycle, we just hit 21 months. Here's analysis from McCullough:


"We’d agree that it’s quite often 'different this time' but it doesn’t mean that it’s going to be different forever and all of the time. Something can happen at a surprising rate then mean revert the other way."

"Take a gander at jobless claims. At any one of these points, 18 months, 19 months, and 20 months, you hit 300,000 then jobless claims jump and eventually recession sets in. So it’s not different this time in that regard."

Why a Fed Rate Hike On "Strong" Jobs Data Is A (Really) Bad Idea - unemployment

"Now, if the Fed raises rates, people are going to get fired left, right and center. So again when you really start to get concerned about the Federal Reserve acting on one of these data points you should start to get really excited about buying all the things we’ve had you in for about 17 months." (For more on what to buy, click here and here.)

In other words, the Fed will speed-up the deterioration of already weak economic data by hitting the monetary policy brakes. Caution is advised.

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