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Tuesday, August 26, 2014

Mixed Messages From a Schizophrenic Economy


Initial jobless claims fell to 302,000, better than expected.  That’s great news, right?  The economy is bouncing back, right?  Not so fast, my friend!

The initial jobless claims report is just another mixed message from our schizophrenic economy that stumbles through a weak recovery.  There are positive signs for unemployment, inflation, and job creation.  But GDP growth, wage growth, labor force participation, and labor productivity all remain weak.  What’s a Fed Chairwoman to do?

As QE winds down, Fed Chair Janet Yellen and the rest of the Federal Reserve Board want to begin the inevitable process of raising short term interest rates, but they won’t until the economy shows that it can stand on its own two feet.  The risk of relying completely on past statistics and waiting too long is that inflation may sneak up on us and get out of control.  That could give the economy an entirely new set of problems.

The Fed has a very difficult challenge ahead of it.  When they decide to raise rates , it will impact all of us.  But with so many weak indicators of the economy, it will be extremely difficult for them to raise rates anytime soon.

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