Sentier Research

The Fed Fails to Soothe Investors


Citing the slowdown in China and other emerging markets; a strengthening US dollar; global market volatility; and persistently low inflation, the Federal Reserve kept short term interest rates at 0-0.25 percent, which is where they have been for nearly seven years. Although the central bankers believe that these issues are “transitory,” they decided to err on the side of caution and do nothing. If Fed officials meant to soothe investors, they failed, at least in the short term. In the category of unintended consequences, the Fed’s inaction, which was meant to assuage, may have had the opposite effect, by reinforcing investors’ worries about the global economy. Previous fears about China’s growth, which caused the summer stock market correction, went straight to the front burner, despite scant evidence that the global slowdown has hit US shores.

Stocks edged lower the afternoon of the decision and tumbled the following session. Although a rate increase may have done even more damage to stocks, the fact that the Fed did not follow through on a rate increase, after telegraphing it for months, has led some analysts to question they can trust what officials are communicating to the public. Paul Ashworth of Capital Economics wrote “A few months ago it was Greece, now it is China. According to the Fed’s accompanying statement ‘recent global economic and financial developments may restrain economic activity somewhat." [His emphasis] In another couple of months it could be the debt ceiling or who knows what else that is generating the uncertainty.”

While the status of the world’s economy may be uncertain now, one thing is clear: median household income in the US is stuck. With all eyes on the Fed, few paid attention to the mid-week release of a Census Bureau report, which showed that median household income was $53,657 in 2014, an $805 decrease from 2013. This is the third consecutive year that the annual change was not statistically significant, following two consecutive annual declines.

More sobering is that when adjusted for inflation, the median household is 6.5 percent lower than it was in 2007 ($57,357), on the eve of the recession and 7 percent lower than it was 15 years ago in 2000 ($57,724), prior to the previous recession. (Income data from Sentier Research are a bit better, but show a similar trend—the median household income in July was 2.6 percent lower than when the recession started and 3.8 percent below January 2000 levels.)

Median income peaked in the mid-1990’s and since then, has gone nowhere fast. Despite hopes for overall wage gains in the current recovery, most of the progress on incomes has been clustered around the top 5 percent of all earners. The gap between high earners and low earners has increased 5.9 percent from 1993, the earliest year available for comparable measures of income inequality.

I hate to end on such a sour note, so perhaps wages will soon start to show improvement across all income levels. Chairman Janet Yellen said that the pace of job gains has been “solid” and fed officials raised their growth forecasts for this year, so maybe, just maybe, the income numbers will start to pick up. Even if they don’t, a sunnier outlook in the fourth quarter is likely to prompt the Fed to raise rates by a quarter-point, either in October or December. 


  • DJIA: 16,384 down 0.3% on week, down 8% YTD
  • S&P 500: 1,958 down 0.2% on week, down 4.9% YTD
  • NASDAQ: 4,827 up 0.1% on week, up 2% YTD
  • Russell 2000: 1163, up 0.5% on week, down 3.4% YTD
  • 10-Year Treasury yield: 2.19% (from 2.19% a week ago)
  • October Crude: $44.68, down 0.01% on week
  • December Gold: $1,137.80, up 3.1% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.30 (from $2.35 wk ago, $3.36 a year ago)


Mon 9/21:

8:30 Existing Home Sales

Tues 9/22:

Weds 9/23:

Thurs 9/24: 8:30 Durable Goods Orders

10:00 New Home Sales

5:00 Janet Yellen Speaks at UMass/Amherst

Fri 9/25:

8:30 Q2 GDP (final reading)

10:00 Consumer Sentiment

Stocks: Up, Incomes: Down


You can forgive the vast majority of Americans for not celebrating last week’s 28th record high of the year for the S&P 500 index. Oh sure, people like to see retirement accounts rise in value, but there is a pervasive sense among workers that they are not getting ahead. In fact, just as the stock market completed its strongest week in four months, a new report from Sentier Research on income revealed that many continue to struggle. As of June, median income for all households, adjusted for inflation, was $53,891. Here's the good news: in the past three years, incomes are up 3.8 percent. The bad news is that in the five years since the recession ended, median income has fallen by 3.1 percent. That’s just one of the reasons that when Federal Reserve Chair Janet Yellen delivered her much-anticipated speech from Jackson Hole, WY, she said that “the unemployment rate has fallen considerably, and at a surprisingly rapid pace,” but “the labor market has yet to fully recover.”

How has it not recovered? Well, as of July, there were 3.2 million workers who have been unemployed for more than 26 weeks and still want a job. Although this is well below the peak of 6.7 million and the lowest level February 2009, it is still very high. Additionally, while the unemployment rate has dropped nearly 4 percentage points from its late 2009 peak to 6.2 percent in July, the broad unemployment rate (defined as the official rate, plus marginally attached workers; those who are neither working nor looking for work, but want a job and have looked for work recently; and people who are employed part time for economic reasons), stands at a lofty 12.2 percent.

And then of course there’s the problem of Americans’ eroding earning potential, highlighted by the Sentier report. But as Yellen noted, part of the problem is structural, meaning that some global economic changes that have put pressure on incomes are here to stay. Sentier found that median income, adjusted for inflation, is 5.9 percent below where it stood in the year 2000. The stunning fact that the average American is WORSE OFF than he or she was fourteen years ago seems to get short shrift in reporting on the recovery.

There are a few factors that have contributed to the longer term slide in incomes: (1) Globalization allowed companies to move operations overseas, where wages were cheaper than in the US; (2) Technological advancements eliminated the need for as many workers overall; and (3) Most public companies have been more concerned with boosting share prices than in paying workers.

In an effort not to end on such a downbeat note, it’s worth noting that economists believe that as the economy continues to improve, incomes will slowly rise. Unfortunately, that may be cold comfort to millions who are having a hard time meeting their daily obligations. As one radio listener recently said, “I like when my 401K goes up, but it doesn’t help me pay the utility bill!”

MARKETS: Just in time for the busy Labor Day weekend, oil and gas prices have dropped to near 6-month lows.

  • DJIA: 17,001, up 2% on week, up 2.6% YTD
  • S&P 500: 1988, up 1.7% on week, up 7.6% YTD
  • NASDAQ: 4464, up 1.7% on week, up 8.7% YTD
  • 10-Year Treasury yield: 2.41% (from 2.34% a week ago)
  • October Crude Oil: $93.65, down 1.2% on week
  • December Gold: $1280.20, down 1.9% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.44 (from $3.54 a year ago)


Mon 8/25:

10:00 New Home Sales

10:30 Dallas Fed Survey

Tues 8/26:

8:30 Durable Goods Orders

9:00 Case-Schiller Home Price Index

10:00 Consumer Confidence

Weds 8/27

Thurs 8/28:

8:30 Weekly Jobless Claims

8:30 Q2 GDP – 2nd estimate (Preliminary: 4%)

8:30 Corporate Profits

10:00 Pending Home Sales

Fri 8/29:

8:30 Personal Income and Spending

9:45 Chicago PMI

9:55 Consumer Sentiment