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