From the monthly archives:

November 2015

In the world of central bank policy, a world intricately connected with the investment banking universe, a key issue keeps resurfacing (recently, the issue has come to the fore more prominently).  The issue is central bank independence, or more particularly, whether the Federal Reserve is playing politics with interest rates.

A number of potential Republican presidential candidates have suggested the current Chairwoman, Ms. Yellen, has kept interest rates extraordinarily low for so long as a political favor to President Obama, the man who appointed her to the post.

Among the Republican presidential hopefuls who have mentioned Federal Reserve policy are Mike Huckabee, Chris Christie, Rand Paul, Donald Trump, Rick Santorum, and a few others.

Some of the hopefuls have simply mentioned the harm the ultra-low interest rate environment is causing seniors and low-income individuals through reduced interest income.  Others have been stronger in their points, specifically stating that the Fed is playing politics with interest rates.

Is there any evidence to back up the Republican hopefuls’ observations?  Here’s a look.

A History of the Federal Funds Rate by President

As a start, here’s a look at the federal funds rate by president. This view doesn’t appear to show any favoritism, at least on the surface.

Rates generally rose through the 1970s and early 1980s. Once high inflation was beaten, rates generally floated lower, rising and falling with the state of economic activity.

Federal Funds Rate, Color Represents History

A Look at the Federal Funds Rate by Party

Next, here’s a look at the federal funds rate by party.  The picture is a little less ambiguous.

It appears that during Republican Administrations, the federal funds rate was more volatile and, it also looks as if the Fed was more likely to raise rates during Republican administrations.  This is checked next.

Federal Funds Rate, Color Represents Party

A Look at the Median and Average Federal Funds Rate by Party and Rate Hikes by Party

Given the background by president and party, here’s a look at the federal funds rate by party according the median federal funds rate (the median is what would happen most often), the average federal funds rate, and rate hikes. Interestingly, these three views appear to show that the Republican hopefuls may be on to something.

When looking at the median, the median federal funds rate is about 1% lower during Democratic administrations.  That’s about a 27% advantage.  It’s gigantic in the world of finance.

The second figure is a look at the federal funds rate on average.  This view shows about a 1.6% advantage for Democratic administrations.

The third figure is the number of rate hikes by party.  Of the past 77 rate hikes, 59 have occurred during Republican administrations.  That’s a giant difference.

4 - Median FF by Party

Average Federal Funds Rate by Party

Rate Hikes by Party

Conclusion

Recently, there’s been renewed interest in monetary policy.  In particular, some have questioned whether the Federal Reserve is playing politics with interest rates.

Now, it’s possible that the Democratic administrations needed the help.  Then again, it’s also possible that the politics explains some of the disparity, as some of the Republican presidential hopefuls have clearly stated.  It’s also possible that no politics go on at the Fed.  The latter, however, does not appear to be supported by the data shown here.

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The U.S. jobs report came in quite good this month at +271K compared to the +160K the market expected.

MM Job Growth Sources: Econometric Studios, BLS

Even more amazing, full-time employment – a key indicator of the real strength of economic growth – came in +540K.  In the past two months, full-time employment in the U.S. has expanded by an incredible 1.12 million.  That’s over just two months.

Over this same period, part-time employment has declined by 716K.

US Jobs Picture Full-Time, Part-time and Total, 2011-2015 Source: Econometric Studios, BLS

In the past two months, one can confidently say that the American job market is on fire.

The strength of the American job market poses the question: how are jobs in the U.S. doing compared to jobs in Europe, China, Russia, Brazil, and a few other large political areas? (Note that some large countries, such as India, are left off of the analysis because employment data out of the country lags far behind.)

Which country has experienced the largest expansion in employment? Here’s a look.

Jobs Across the Globe

The next graphic looks at employment growth in the United States, the Euro Area, China, Japan, Germany, the United Kingdom, France, Brazil, Italy, Russia, Canada, Australia, South Korea, and Spain. The figures plot the percentage growth in jobs since 2009 – the approximate point when the global economy bottomed out.

Which of the countries listed would you guess experienced the strongest employment growth?

Interestingly, on top is South Korea.  Since 2009, businesses in South Korea have added almost 13% to their employee base. In second and third places at about 9% each are the United Kingdom and Australia. Rounding out the top 5 are Brazil (up about 8%) and Canada (up about 6%).

On the other end, the bottom 5 countries for employment growth are Span (still down 10% from its January 2009 figure), Italy (down about 3%), France and Japan virtually flat, and the European 18 (up a about half of a percent).

Employment Growth since 2009 Sources: Econometric Studios, Haver Analytics

What’s Behind the Strength/Weaknesses?

With the percentage growth picture known, what explains the strength in job growth in South Korea, the U.K., Australia, Brazil, and Canada?  Why are businesses so weak in Spain, France, the Europe 18, Italy, and Japan?

The answer, unsurprisingly, lies in a web of interconnected factors.  Businesses are likely adding jobs at a faster pace in South Korea because of its connection with China, and having a strong technology sector.  A different story holds for the U.K.  Instead of technology, although technology is certainly important in the U.K., the finance sector appears to be a major part driving the employment growth in the U.K.

On the other end, business growth is weak in Spain, France, and many other European countries for a number of reasons, including an internationally expensive labor conditions, regulatory environments, and large government sectors.  The story behind Japan is similar to the U.K., although demographics may be an even greater force in the world’s third largest economy.

Conclusion

Overall, job growth across the globe is quite varied.  In looking at job growth by country since 2009 for the largest economies in the world (by political boundaries), businesses in South Korea come out on top, with employment up about 13%.

On the other end, business in Spain is the weakest, still down 10% over the same period.

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