The Week in Review: Markets Rejoice on Fed Decision as Economy Woes Worsen

Stock markets in Asia and Europe joined America’s market in celebrating Janet Yellen’s admission that the global economy is not doing so well.

The Federal Reserve announced on Wednesday that the central bank would not raise rates more than twice in 2016, and that it would target a 0.9% Federal funds rate by the end of the year. That is down from previous guidance of 1.4%, as the Fed also downgraded its GDP growth expectations for 2016.

Stock markets in Asia and Europe joined America’s market in celebrating Janet Yellen’s admission that the global economy is not doing so well.

The Federal Reserve announced on Wednesday that the central bank would not raise rates more than twice in 2016, and that it would target a 0.9% Federal funds rate by the end of the year. That is down from previous guidance of 1.4%, as the Fed also downgraded its GDP growth expectations for 2016.

Seeing just 2.2% GDP growth in America in 2016, versus the 2.4% previously, the Fed upgraded its estimate for 2017 to 2.2% from 2.1%, while expecting unemployment to fall to 4.6% by the end of 2016 and to stagnate at that level in 2017. With unemployment little changed from current levels, price growth in the consumer-facing markets is expected to stay below the Fed’s target, as the FOMC said its core PCE inflation expectation is 1.6% for 2016 and 1.8% next year, a decline from previous estimates.

Admitting that the global economy is not doing as well as it had expected in December, the FOMC said in a statement that America is at risk due to its exposure to weaker foreign markets. “Global economic and financial developments continue to pose risks,” the FOMC said in a statement.

Additionally, elusive signs of inflation have also encouraged the Fed to keep borrowing costs down. “Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further,” the FOMC said.

Weak Wage Growth, Deflation

Several indicators that American workers and businesses are not doing well came to the forefront this week.

Fitch Ratings announced it expects bond defaults to soar in 2016, seeing default rates of 6% in the high yield market, a trebling from the prior year. While this was largely the result of anticipated defaults in energy, the ratings firm also cautioned that companies broadly are struggling. Additionally, the Census Bureau noted that manufactures and trade sales fell 0.3% year-over-year, with merchant wholesalers’ sales falling 3.1% year-over-year. Retail and food services also saw a decline.

American workers are struggling too. Although unemployment levels fell 0.8% from the prior year to 4.9%, around the level that the Federal Reserve sees as “full employment,” the labor participation rate remains the lowest in two generations and wage gains are not materializing. Not only are household incomes down from 1999 to 2014, according to the Census Bureau, but also a new study by the Economic Policy Institute noted that incomes have remained flat since then.

With weak wage gains and falling sales, it is not too surprising that final demand goods prices are declining. This component of the Producer Price Index was the weakest, causing the PPI to fall 0.2% month-over-month.