Monday, September 15, 2014

US WILL NOT RAISE INTEREST RATES

There is great amount of dilemma about what is going to be next action for the US economy in terms of rate hikes. Will the US economy would be able to raise interest rates and make the world surprise. Well I start my conclusion its will be huge damage to the US economy if interest rates are hiked since that would put bigger brakes on the slow growth of the US economy which is currently prevailing. US unemployment numbers have come down but the inflation and wages are very low. Now let’s study the depth of the low and reason behind this strange performance of the economy. The unemployment rate has sunk to a nearly normal 6.1%. 

Employers have added a robust 2.5 million jobs the past 12 months. Well the numbers are impressive enough for the US interest rates to start rising but how much faith the numbers and the other macroeconomic numbers have is the question of trillion dollars. In the latest macroeconomic report it has been confirmed hat average hourly pay has crept up only about 2 percent a year since the recession ended five years ago — barely above inflation.

Wage rates remain lows as the number of people seeking job are more as compared to the historic scenarios. According to researchers at the Federal Reserve Bank of Chicago based on historical trends, the steady drop in unemployment should have raised inflation-adjusted wages by 3.6 percent by June but that’s not happening due to increased number of job seekers compared to the number of jobs available in the market. There are 227,000 fewer people with jobs than in November 2007, just before the recession began. 

Yet the working-age population has increased by 15.3 million since then. That's kept the number of unemployed elevated: 9.6 million Americans, up from 7.6 million when the recession began. Further part time workers numbers has increased considerably over the last couple of years which pushes down the wage rates compared to the full time workers. There are 7.2 million involuntary part-timers, up from just 4.6 million in late 2007.


 Historically its has been found in economics that when job market revives the wage rate also improves as people change jobs and also inflation takes an upward toll. But this did not happen for US economy currently. Hence if interest rates are being hiked then more unemployment would generate since despite of free capital if employment situation is like this then just imagine what might happen if it goes up.Moreover In 2012, U.S. non-financial companies filled their coffers with an additional $130 billion, taking their total cash to a record $1.45 trillion as the economy has stagnated and the labor market has moved sideways. Well currently this amounts to around double of that number of 2012. So it clearly reveals that US companies are not spending and they are not willing to do so. Well in these situations how US will take the risk of interest rates hike. Well last year they played the same game and made billions through the bond market rattle and now they are left with no ammunition.

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