In her Friday speech from the Fed’s meeting in Jackson Hole, Wyoming, Janet Yellen remained non-committal on when the Fed would start raising interest rates. Recent data indicates the economy continues to improve (albeit slowly). However, the Fed chairwoman remains concerned about labor-market conditions.
Unemployment
While the unemployment rate has fallen significantly from its October 2010 high of 10.0% to 6.2% in July, concerns about the quality of the data remain. Millions of workers remain sidelined, discouraged, underemployed or stuck in part-time jobs. Unfortunately, these facts are not fully captured in the unemployment rate.
Inflation
At the same time, inflation has increased modestly, and at 2.5% over the last six months, the Consumer Price Index (CPI) is now slightly above the Fed’s target during this period. (The annual percentage change in a CPI can be used as a measure of inflation.) In addition, consumer prices year-to-date are up 2.4% versus 1.2% for 2013’s first seven months. The more hawkish members of the Fed are concerned that the Fed may be falling behind the curve and should raise rates sooner rather than later. Their primary concern is that maintaining the current zero-interest rate policy for longer could lead to inflation or possible asset bubbles.
Ms. Yellen wants a greater level of comfort that the labor market is recovering before committing to an increase in the Fed Funds rate. Continued signs of economic growth combined with further labor market improvement could result in a sooner-than-expected increase in interest rates. However, Ms. Yellen’s statements indicate that she believes more work may be in store.
At BWFA we continue to believe that rates will remain lower for longer, meaning interest rates are unlikely to increase until at least 2015’s second quarter. With interest rates remaining at historically low levels, investors have comparatively few places to put their money and earn a reasonable rate of return. Against this backdrop, we continue to seek attractively valued securities providing investors with a sufficient margin of safety.