The United States economy has been booming for quite some time now. That’s thanks to the low, near zero, Federal Reserve interest rate. While the Federal Reserve planned to increase their rate by the end of the year, new economic data shows troubling signs for the US economy. This means that the Fed is not so likely to increase their interest rate anymore. Today we’ll talk about the economic data that’s showing troubling signs for the United States, why it has anything to do with the Federal Reserve’s interest rate and what this means for the market.
US Job Growth Is Becoming A Big Issue
One of the first things that economists look at when gauging any economy is job data. When looking at the job data from the United States, troubling signs start to emerge. On Wednesday, the US jobs report for the month of September became available. In the month, only 142,000 jobs were added to the economy. While that may seem like a relatively high number, the reality is that it’s nowhere near what we need to see to call economic conditions in the United States positive. In fact, positive jobs growth is considered to be any number over 200,000. Not to mention, economists were expecting the US economy to grow by between 204,000 and 225,000 jobs.
Why Does This Have Anything To Do With The Federal Reserve Interest Rate
To understand why the jobs report has to do with the Federal Reserve interest rate, it’s important to understand why the rate was reduced in the first place. Several years ago, in the depths of the 2008 and 2009 financial crisis, the Federal Reserve had to do something to stimulate economic growth. So, they came up with a two-part plan.
- Part 1 – The first part of the plan was to reduce interest rates to nearly 0%. In doing so, consumers in debt would spend less money on interest. This ultimately led to more money being available for purchases of products and services. In turn, the low interest rate would stimulate economic growth.
- Part 2 – The second thing the Fed did was start a U.S. government bond purchasing program called quantitative easing. In purchasing the bonds, the demand for bonds was increased. As a result, returns on bonds weren’t as positive, which led to investors seeing stocks in a more attractive light and funding more corporations. In turn, corporations had more funding for hiring and growth.
In late 2014, the Federal Reserve put an end to the bond purchasing program. At that point, the economy was looking far better. However, the interest rates remained in effect. Although the Fed would like to increase the rate by the end of the year, with economic conditions the way they are that doesn’t seem like it’s going to happen.
What This Means For The Market
- Stock Market – When it comes to the stock market, poor economic conditions lead to declines. While we have seen positive data recently, I’m not expecting that optimism to last very long. In fact, I’m expecting to see market turmoil relatively soon.
- Currency Market – Those who trade currency pairs can expect to see more declines in the value of the USD. As a result, the CAD is likely to climb further.