Tags: Fed | inflation | bowl | stocks

Good Economic News the Latest Threat to the Stock Market

By    |   Friday, 17 Oct 2014 07:54 AM

Bear markets usually start when the economic news is positive. That's because the Federal Reserve is forced to tighten monetary policy before the economy becomes overheated. One Fed chairman described this part of the job as the ability "to take away the punch bowl just as the party gets going."

The Fed chairman who made that statement was William McChesney Martin, who served from 1951 to 1970, a time of unusually strong economic growth. Based on the prosperity enjoyed under Martin's leadership, the Fed did its job well at that time.

If current Fed Chair Janet Yellen is going to take the punch bowl away just as the party gets going, she might need to act now. The latest data pointing to economic strength is the employment report.

In September, the unemployment rate fell to 5.9 percent, a six-year low. In Thursday's data, new claims for unemployment fell to their lowest level since April 2000. The high number of long-term unemployed is indicative of a structural shift in the economy and is not a sign of a weak job market. It is more a sign of a low-paying job market that is nearing full employment.

When unemployment falls too low, inflation is expected to accelerate. The Fed's own data are telling Yellen that it's almost time to raise rate. Fed officials estimate the short-term, non-accelerating inflation rate of unemployment is 5.7 percent, just below the current level of unemployment. Unemployment of less than 5.7 percent is expected to be inflationary.

Higher interest rates could spell the end of the bull market in stocks. Traders looking at this employment data may be the driving force behind the recent selling.

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MichaelCarr
Bear markets usually start when the economic news is positive. That's because the Federal Reserve is forced to tighten monetary policy before the economy becomes overheated. One Fed chairman described this part of the job as the ability "to take away the punch bowl just as the party gets going."
Fed, inflation, bowl, stocks
278
2014-54-17
Friday, 17 Oct 2014 07:54 AM
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