Dammit Janet! Just cut it already!
On Friday the US Department of Labor announced that the US labor market added an astounding 271,000 jobs in October, according to the Bureau of Labor Statistics. This beat analysts’ expectations of a gain of 185,000 jobs. In the wake of this news, Asia Unhedged thinks it’s now time for Federal Reserve Chair Janet Yellen to do what she’s wanted to do for months and raise US interest rates.
Last month’s report showed the single best month for job growth in 2015, ending two consecutive months of poor reports when the numbers came in below 200,000.
“Job gains occurred in professional and business services, health care, retail trade, food services and drinking places and construction,” Friday’s jobs report said. “Over the prior 12 months, employment growth had averaged 230,000 per month.”
Everyone expected the Fed to raise rates in September, and when it didn’t the market reaction was less of relief and more of annoyance. The Fed’s indecision has showed it has an incoherent fiscal policy and created unnecessary volatility in global markets. Everyone knows the Fed wants to raise rates and everyone is prepared for it, so like the proverbial band-aid, just do it and rip it off quickly before another negative economic report gives the Fed more reason to dawdle.
Asia Unhedged thinks the impending US rate hike provides the best of all opportunities for China to decouple it’s currency, the yuan, from the US dollar before it experiences another surge in its real effective exchange rate (REER) and makes a bad export situation worse. More importantly, a decoupling of exchange rates would free China to conduct an independent monetary policy as it opens the capital account further and to decisively lower its exorbitant real interest rates, which now range well above 6%. In two or three steps China should move to zero to 1% nominal rates and 3% real rates to get the economy back on track and counter the tightening and deflationary effects of accelerated reforms.
So here is what we wish for this coming week: Yellen hikes interim; China cuts by two points. It won’t happen – probably. But by the first half of next year, that will be the lay of the land.