The Wages of an Oil Bust?

Could falling oil prices delay the Fed’s rate hike?

Source: Federal Reserve

Among economists the current consensus is that the Fed will begin to raise interest rates sometime in mid-2015. There’s discussion about their official statement which explains that they expect to maintain the current rate regime for a “considerable time” following the end of their asset-purchase program, which ran out in October. A change in the statement would continue to prepare the markets for higher rates—something the Fed wants to do. Gone are the days of Alan Greenspan’s creative obfuscation. Now the Fed wants to gradually guide the markets’ expectations. The best surprise is no surprise.

The Fed has said for some time they want to return rates to normal levels. Janet Yellen is a very methodical leader, and she runs the Fed in a very methodical manner. She has testified that she is especially concerned about income growth, and the most recent employment reports indicate that average hourly wages are picking up. Wages are currently growing about 2% per year. If trends continue, that growth rate may move up. That would give the Fed leeway to begin to normalize policy.

But all incomes are local. It’s an old joke that when Warren Buffett goes to the barber, on average everyone in that shop becomes a billionaire. Average wages have been rising, but unevenly across the country:

Source: Bureau of Labor Statistics

Wages have risen most strongly in the oil-patch, right down the middle of the country. Since the Fed’s October meeting oil prices have collapsed. Fed Governors probably won’t be concerned about the effect of falling oil prices on inflation—they will likely see that as transitory. But they might be concerned about what oil prices could do to wages. If the boom has been lifting average earnings due to overheated economies in North Dakota and Kansas, will an oil bust have a depressing effect?

On balance, lower oil prices will improve the economy, and that will be good for everyone. But the Fed’s in a tough spot. They want to normalize policy, but plunging crude oil prices hardly make the current situation normal. I expect that they will note that it bears watching. The last thing Yellen wants is to raise rates just as the economy skids off the road on an oil slick.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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By |2017-07-17T12:23:09-04:00December 17th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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