December 9, 2019
Last Friday, the Labor Department reported November as another great month for employment, with 266,000 new jobs added. Excluding the 44,000-job boost in the durable goods industry produced by the end of a 40-day strike at General Motors, the new jobs figure was still better than the 180,000 analysts expected. In addition to the new jobs created, average wages continue to increase, up 3.1% from last year. With the unemployment rate at 3.5%, its lowest since 1969, economists have been waiting for signs of wage inflation. Yet, wage and general inflation rates remain in check, and stock investors responded, lifting prices to all-time highs in the S&P 500 Index.
In reflection, it seems the Federal Reserve was wise last summer to anticipate a slowing US and global economy, putting the brakes on tighter monetary policy in favor of lower interest rates and more liquidity. The Federal Reserve’s primary objectives, as established by the U.S. Congress, are to maximize employment (jobs), stabilize prices (inflation) and moderate long-term interest rates (borrowing costs). So far, the Fed’s delicate balancing act of growth without unexpected inflation appears to be effective.
In 1913, when Congress established the Central Bank and its mandates, it’s likely the members weren’t thinking about the importance of nominal and real interest rates in other developed countries. However, in today’s interconnected global economy, cross-border financing makes relative interest rates an important variable. Of the 19 developed nations in the world, only Italy has a positive real 10-year yield, currently at 0.89%. All other countries have either negative or zero real yields – leading the pack is the Netherlands at -3.0%, followed closely by Germany at -1.42%. With inflation and the 10-year yield both hovering around 1.8% in the US, real yields are currently zero. For comparison, if you look back through 1948, the historical median for real returns on bonds in the US is 2%.
In 2005, former Federal Reserve Chairman Ben Bernanke began talking of a worldwide surplus in savings. He called it the “global savings glut,” blaming unusually low global interest rates on a global excess for desired savings over desired investment. Today, with an aging worldwide population in the developed world and growing trends for saving more and spending less, perhaps Bernanke’s predictions of “lower interest rates for longer” will subsist.
So long as the Fed sees benefit in keeping rates low and not stirring the inflation pot, the world’s Central Banks may follow suit and keep interest rates very low. For the time being, keep creating new jobs, and hooray for the Fed!
Gary B. Martin