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Reading economic tea leaves, Wall Street can’t figure out what Federal Reserved Board Chairwoman Janet Yellen and the Open Market Committee will do about raising interest rates when they meet in June to set monetary policy.  Set at rock bottom Dec. 16, 2008 by former Fed Chairman Ben S. Bernanke during the beginning of the Great Recession, the federal funds rate—the rate the Fed charges in preferred banking customers—remains at record lows, zero-to-a-quarter-of-a-percent.  Bernanke first used extreme monetary policy to offset what could have been a “hard landing,” leaving the economy reeling after the 2008 financial crisis where the nation’s biggest banks ran out of cash.  Unable to stimulate the economy enough with low rates, Bernanke decided to start “quantitative easing,” where the Fed purchased $85 billion a month in U.S. treasuries to help improve the money supply.

Since Jan. 1, the U.S. stock market have moved sideways, running up to new all-time highs then selling off by roughly 1,000 point on the Dow Jones Industrial Average, ending the session today at 18,285, close to another record high.  Wall Street traders have tried to price a rate hike into the cost of doing business since the first of the year.  Just when U.S. Treasuries sell off and rates go up, another anemic report on the U.S. Gross Domestic causes rates to drop again, mirror underlying weakness in the U.S. economy.  Wall Street traders expecting a rate hike in June will most likely have to wait until at least September before getting their wish of hiking rates.  “Many participants, however, though it unlikely that the data available in June would provided sufficient confirmation that the conditions for raising [interest rates] had been satisfied . . . “ read minutes of the last Open Market Committee meeting.

For the past seven years since Bernanke dropped rates, the hope was to start ratcheting up rates when the economy improved. Reports on Q1 GDP at the Fed’s April 28-29 meeting showed that the economy slowed to a crawl, pushing U.S. GDP down to 0,25%, dangerously close to another recession. While the Fed expects some improvement in Q2, it’s not enough to start hiking rates.  Concerns about the abundance of low-wage, part-time jobs suppressing the unemployment rate discourages the Fed from raising interest rates.  While Q1 bad weather drove down the GDP to a quarter-of-a-percent, it’s not expected to bounce back much before the Fed’s next Open Market Committee Meeting in June.  Low interest rates and low oil prices didn’t translate into expanded consumer spending.  Minutes of the Fed’s April meetings expressed concerns about a slowdown in Europe and China.

Since the economy began adding private sector jobs in March 2010, the U.S. has replaced the some 8 million jobs lost in the Great Recession.  Fed officials now worry that while jobs growth has dropped the nation’s unemployment rate to .5.3%, the quality of employment hasn’t added enough to the consumer economy to boost the nation’s GDP.  Since Obama took office Jan. 20, 2015, he’s been battling a GOP-controlled or at least dominated Congress opposed to adding government jobs, the backbone, according to Keynesian economists to building the nation’s middle class.  Fed officials haven’t figured out exactly what to do to boost GDP spending other that setting monetary policy at rock bottom levels.  “Energy prices were no longer declining and most participants continued to expect that inflation would move up toward the committee’s 2 percent objective over the medium term,” read the Fed’s April minutes.

Despite recommendations from New York University Stern School Nobel Prize-winning economist Joseph I. Stiglitz for the government to launch major infrastructure projects, Yellen hasn’t conveyed those suggestions to Congress.  Because Democrats and Republicans aren’t on the same page, Republicans oppose adding government jobs fearing that they’d add to federal budget deficits.  Unlike the old GOP thinking about Supply Side Economics, urging Congress to cut taxes to stimulate the economy, the new thinking outlined by Stiglitz indicates that government jobs are an essential part of U.S. GDP.  While some 80% of economists believe the Fed will hike interest rates in the Fall, Yellen won’t raise rates unless she sees significant changes in GDP.  Despite the Fed’s rock bottom interest rates, the U.S. economy still teeters on recession, preventing Yellen from hiking rates.

Yellen finds herself in unchartered territory figuring out how to transition the economy from its current deflationary cycle, leaving U.S. GDP stagnant.  Since energy and food aren’t part of the Fed’s inflation metric, it’s going to be difficult to boost GDP with stagnant wages.  Looking for inflation to justify a rate hike, Yellen continues to see deflationary pressures in the U.S. economy.  Years of Washington gridlock have harmed the U.S. economy, making it difficult for Democrats and Republicans to agree on bipartisan economic legislation.  “Some participants pointed out that, by some measures, the most recent monthly inflation readings had firmed a bit,” read the April minutes but only related to food and energy prices.  If the Fed and Congress want to improve GDP to eventually raise rates, they need to follow the advice of Nobel Prize-winning economists to boost the government jobs.