How does a fall in median income of 6.5% fit with a US interest-rate rise?

Today is one where all eyes will be on New York at 7 pm UK time today. This is because the US Federal Reserve will announce its latest decision on interest-rates and via its Forward Guidance has raised expectations of an interest-rate rise. This would be its first of the credit crunch era and in fact the first change in trend for more than a decade as it was 2004 when it last voted for what became a series of interest-rate rises. Makes you think doesn’t it? Also I make the point on here from time to time that interest-rates have been in their own secular decline for quite some time which I shall illustrate with a very long-term chart of US bond yields and thanks to Barry Ritholz for it.

What this shows is that panics have been quite common really on a longer-term perspective and that there was a time before the US Federal Reserve. But my main point is that since 1981 there have been ebbs and flows in crises that seemed important at the time but Status Quo summed up the trend for interest-rates.

Down,Down Deeper and Down

Accordingly there are very few people around who were actively trading and dealing when the trend in the 1970s was from Yazz.

The only way is up baby.

Thought for thought and this is why the central banking mantra is this as expressed in Hit Me Baby One More Time fashion by Bank of England Governor Mark Carney yesterday in evidence to the UK Parliament.

The path of Bank Rate is much more important than the precise timing of the first increase, however…… I expect Bank Rate increases, when they come, to be gradual and limited to a level below past averages.

He returned to this subject later on.

It also seems likely that the equilibrium interest rate, having been sharply negative during the crisis, will move only slowly back up towards historically more ‘normal’ levels.

If you look at the long-term chart I have presented above it is hard not to have a good laugh at Governor Carney’s definition of “normal”. But he means that he expects UK Bank Rate to rise to around 2.5% which is about half of what was considered for a while to be normal for the UK as the NAIRU was considered to be around 4.5%. Non Accelerating Inflation rate of Unemployment in case you were wondering but do not disturb yourself too much as it is best forgotten and left in some backwater.

The Impact of “Open Mouth Operations”

This is where central bankers promise something under what is called Forward Guidance. In the UK and US this has involved promises of higher interest-rates but so far it has involved false starts with the US markets starting to price interest-rate rises towards the end of last year. This was because in her first press conference Fed Chair Janet Yellen gave a timescale of six months after the end of Quantitative Easing.

So what was supposed to be a guided path has had several misfires but the markets are like Pavlov’s Dogs these days as they await the next central banking handout and we have seen moves in two main areas.

The US Dollar

It must be living in the United States that prompted Bank of England policy maker Kristin Forbes to point this out last week and the emphasis is mine.

Sterling’s effective exchange rate has appreciated 17% since its recent trough in the spring of 2013. The U.S. dollar has appreciated by about 20% over the same period, while the euro has weakened by 7%.

If it was the UK then it would be equivalent to a 5% rise in interest-rates but the US is much more insular so let me say certainly 1% and maybe a bit more. The exact cause is a combination of perceived economic improvement and Forward Guidance which of course interrelate.

Let me jump to something which the European Central Bank has released this morning in its monthly review.

the outlook for real GDP growth has been revised down, primarily due to lower external demand owing to weaker growth in emerging markets.

Now if it is feeling that with a lower Euro what must US exporters be feeling with a higher level for the US Dollar? I think the interest-rate rise equivalent is pushing well above 1% now.

Bond Yields

These have been rising over the past month or so with the US Treasury Note (10 year)  yield rising from a nadir of 2% to 2.28% as I type this. The US 2 year yield has risen proportionately more from 0.57% to 0.8%. Whilst this may not be much in terms of the chart above it means that is now yields more than the German ten-year. That would be a trade which would have some excitement today would it not?

Also we have something of an illustration of the world power of the Federal Reserve as bond yields in general have risen over this time.

The outlook

Other central bankers have gone out of their way to express fears over the immediate outlook. From Bank of England Governor Carney.

Actual headwinds to UK growth could grow if a potential further material slowing of growth in China and more broadly in emerging markets materialises.

From the ECB this morning.

Notably, current developments in emerging market economies have the potential to further affect global growth adversely via trade and confidence effects.

What about inflation?

Yesterday we were told this by the US Bureau of Labor Statistics.

The all items index increased 0.2 percent for the 12 months ending August, the same increase as for the 12 months ending July.

So it is a full decimal point away from the target. Even worse in this context is the fact that it uses a measure (PCE Inflation) which tends to be some 0.4% or so lower than this.

So we can see that as the oil price fall washes out of annual comparisons there will be a rise but enough to go above target? Certainly nowhere near the position back in 2004 (H/T @moved_average).

YoY CPI 0.2%..last time Fed raised in ’04 …3.3%


Like the UK the United States is seeing a bit of a pick-up as yesterday’s data contained this too.

Real average hourly earnings for all employees increased 0.5 percent from July to August……This increase in real average hourly earnings combined with a 0.3-percent increase in the average workweek resulted in a 2.3-percent increase in real average weekly earnings over this period.

However a counterpoint to this has been published by the Census Bureau.

In 2014, real median household income was 6.5 percent lower than in 2007, the year before the most recent recession…… and 7.2 percent lower than the median household income peak ($57,843) that occurred in 1999.

Poorer this century? Well we know why interest-rates have continued to fall then..

Also my argument that there is a road to negative interest-rates gets a tick as I note that the last 3 years of “recovery” have made no statistically significant change.

Much remains to be done about poverty too.

In 2014, the official poverty rate was 14.8 percent. There were 46.7 million people in poverty……The 2014 poverty rate was 2.3 percentage points higher than in 2007, the year before the most recent recession.


There is much to consider here and let me start with a more philosophical question. Is this the end of inflation targeting? I have raised this question before and the issue is whether it is possible in the credit crunch era to look a couple of years ahead? In my opinion the answer is no. On this road looking at the Census Bureau numbers we also have the issue of what is a recovery?

Such thoughts are the ones which in my opinion are likely to stay the hand of the Federal Reserve this evening. Central bankers are pack animals and we have seen what the Bank of England and ECB think. If a rise went wrong the Federal Reserve would run the risk of looking very foolish and would undo what they consider to be years of work and success. Oh and every central bank that has raised interest-rates in this fashion in the credit crunch era has then subsequently cut them!

Songs for an interest-rate rise

Just in case I would not want to miss out.

The Only Way Is Up by Yazz

Higher and Higher by Jackie Wilson

Move On Up by Curtis Mayfield

Start Me Up by the Rolling Stones

Coming Up by Paul McCartney and Wings

Or if you feel like a break

Wake Me Up When September Ends by Green Day

More suggestions are welcome…..


20 thoughts on “How does a fall in median income of 6.5% fit with a US interest-rate rise?

  1. Hi Shaun
    What is a recovery?

    It’s supposed to mean that median incomes consistently
    improve but currently it’s just smoke and mirrors by
    overpaid yes men who failed maths but graduated with
    honours in BS.

    I could end up with egg on my face but May I suggest a
    song for Janet Yellin Tonight.

    Tears for Fears
    Woman in chains

    Which by the way is one of my alltime favourite tracks.


    • She is chained, as Shaun points out,by the craven groupthink of our CB overseers,who are afraid to stand out.

      There’s a reason we’re a long way up poop creek sans paddle and in my opinion,western world CBers have a lot to answer for.

    • Hi JRH

      Janet Yellen looked nervous and shifty in the press conference so your song worked well. You would think that she had been promising and not delivering or something…..

      Oh and as for forgetting the question about US Fed leaks in 2012 that was amateurish to say the least.

  2. Great blog, as usual. As you say, the BLS targets the PCEPI, which usually tracks lower than the US CPI-U. Exceptionally, for July 2014 (August estimates for the PCEPI aren’t available yet) it shows a 0.3% annual change, as opposed to 0.2% for CPI-U. However if one compares the PCEPI level for July 2015 at 110.89 to the seasonally adjusted CPI-U level at 109.76, one can see that the trend is for the PCEPI series to grow less rapidly. (I have rebased the CPI-U series to 2009=100 for comparability with the PCEPI. The BEA publishes tables that reconcile the two estimates:

    but when I tried to check it out, I couldn’t see them, possibly because they are in the process of being updated. From 2009 to date, the gap between the two series seems to have converged substantially. I am not sure why this, but as is my wont, I would blame it all on President Obama. (There are big differences in the treatment of health care between the PCEPI and the CPI-U, so it may actually have something to do with Obamacare.)
    With the exception of the Swedish Riksbank, I believe the US Fed is the only central bank that targets a consumer price series with an annually linked series with a symmetric formula. For the PCEPI it is the Fisher formula; the Swedish CPI uses a different formula. Other things being equal, this will reduce the upward bias in the measurement of inflation, so 2% measured inflation based on the US PCEPI will actually, ignoring other differences, represent a higher inflation rate than 2% measured inflation based on the UK CPI or the ECB MUICP. So the formal consistency of the US Fed in adopting the same target rate as previous inflation targeting central banks betrayed a logical inconsistency: in a sense they are actually targeting a higher inflation rate.

    • Hi Andrew

      I remember one of the US Federal Reserve’s analysing the gap between US CPI and PCE inflation and concluding that with sometimes wide variations it was 0.4%. Your addition is interesting as it is another relationship that has broken down in the credit crunch era so far. Ironically in exactly the opposite way to the expanding gap between CPI and RPI in the UK. We need to keep on our metaphorical toes at all times!

      Your point about the implicitly higher inflation target gives some food for thought too. Would you be able to estimate the likely impact?

  3. Hello Shaun ,

    You posed 2 questions

    Is this the end of inflation targeting?

    Were they targetting inflation anyway ? I’d posit its WAGE inflation not RPI ( real price index) or CPI ( Creative price index )

    And if we sure wages are going up then they will raise interest rates

    Seems paradoxical or How Bizarre ( OMC )

    what is a recovery?

    Indeed , if you’re Gerry Mandering the inflation figures , unemployment and so on I guess Humpty had the answer

    “it means just what I choose it to mean—neither more nor less.”
    “The question is,” said Alice, “whether you can make words mean so many different things.”
    “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

    So who is the master in this “recovery”

    Who did not see a recession are the top 0.1% and now they going to recover……


    • Hi Forbin

      I rather liked that song :). As they were Kiwis a rare beast in some ways and of course linking to the Rugby World Cup.

      As to inflation targeting there was always the nominal GDP target claim which some argued they should be targeting and others of us who wondered if they actually were! Well the US is short of 5% nominal GDP right now and therefore it hasn’t raised would perhaps be a good subject for an article.

      In the Census Bureau figures there was one group who had done much better than everyone else but I see that you have spoiled any suspense!

  4. ‘ Is this the end of inflation targeting?’

    If it isn’t it should be……..
    1) they’ve pretty much failed to keep inflation on target for a very long time
    2) their measures of inflation are flawed
    3) they’ve created asset bubbles as a consequence that will ultimately cause untold damage to the banking system and our national balance sheets.
    4) they’ve pretty much derailed the real economy as a result.

    The figures for median incomes in the US mask a real decline in working age household incomes.It’s the same over here.If we then look at working age household incomes and strip out public sector workers(who are being financed by 5%+ fiscal deficits),then the figures would be even more dire.

    The problem with the CB’s in my opinion is that they’re trying to cure the wrong disease with the wrong treatment.

    They seem believe that creating price inflation can create/sustain GDP growth which is true from a mathematical perspective perhaps.In the real world there are several problems with that.
    1) raising GDP doesn’t necessarily create higher incomes
    2) raising incomes don’t necessarily lead to higher consumption.

    All they’ve done with ZIRP,QE etc is create an even bigger housing bubble and drive down the velocity of money.

    • “The problem with the CB’s in my opinion is that they’re trying to cure the wrong disease with the wrong treatment.”

      I’d posit they were interested in fighting a 1930’s asset devaluation – and they have succeeded on that , sort of…

      but they havent a clue were to go from here as the next cycle emerges and we still have asset deflation

      QE27 ?


      • I see your point Forbin,and on the basis you’ve taken you’re right.They’ve cured a stock asset inflation-housing round 1.They’ve then tried to cure that devaluation with asset inflation-housing round 2 and stock market.

        In the context of GDP,they’ve fought the good fight and all seems well.

        My theory is that the central problems have been, a misallocation of resources and capital away from where they’re economically productive(and into areas where they aren’t) and a massive demographic shift that’s fundamentally changed demand patterns.

        This latter point is one plank of the Paul Hodges thesis.

        The CB’s have kept GDP up but at the price of driving down velocity.Velocity-to me-is a proxy for people’s confidence in their economic/financial future.Where people see low rates and declining returns on their savings.they cut spending.

        Cor,I’m dull.

    • I think you’ll find that if Public sector pay was left in the figures then real pay would look even worse than with Public Sector pay left out – you would effectively be massaging the pay numbers UP by excluding Public Sector workers – be careful you are close to becoming a puppet of Dave and George.


    Paul Hodges explains wrote a great piece on this yesterday.

    ‘They assured us that the 2008 Crisis was just a liquidity crisis, and said the need was to use stimulus to unblock the financial plumbing system

    But in fact it was a balance sheet crisis, where there was too much debt – as people hadn’t saved enough to fund their extended retirement

    They also promised us that that lower interest rates would stimulate demand

    But in fact, the average European and Japanese household is now headed by someone over 55, and the US is moving in that direction. Lower interest rates actually destroy demand amongst this age group who are more dependent on their savings for spending money

    A 5% interest rate on an average $30k saving pot would give them $1500/year to spend, or $125/month. But instead today’s low interest rates mean they have to save more, and spend less, if they hope to have sufficient income to survive their likely 20 years of retirement

    Policymakers’ theories about the economy were formed a long time ago, when the BabyBoom was well underway, and so essentially target the ‘average 40-something white male’ . This is why they have failed to work as promised.

    They ignore the complete change that has taken place in populations since 1970, with increasing female participation in the labour force, and the growth of multi-culturalism. Biologists’ models of ‘competing populations’ would solve this problem overnight, if policymakers were prepared to look outside their own narrow field of academia.’

    • “But in fact, the average European and Japanese household is now headed by someone over 55, and the US is moving in that direction. Lower interest rates actually destroy demand amongst this age group who are more dependent on their savings for spending money”

      A 5% interest rate on an average $30k saving pot would give them $1500/year to spend, or $125/month. But instead today’s low interest rates mean they have to save more, and spend less, if they hope to have sufficient income to survive their likely 20 years of retirement”

      This is a point I made on here some time ago, and I DO believe it’s relevant, but there’s more: with housing and energy costs so high for that group’s children, it’s certain that spare money from their parents was a large part of THEIR disposable income.
      “Treats for the grandchildren” become less affordable too.
      This is the dichotomy of the housing bubble and it’s the exact opposite of the banks’
      Homeowners, in particular the over-55s, are asset-wealthy, hugely solvent, due to the value of those homes, but have very real liquidity problems, as the consequences of the tanking of annuity values kicks in over time.
      A problem set to worsen over the next 10-20 years as many of those who retired early with better pensions pass away.

  6. ‘Homeowners, in particular the over-55s, are asset-wealthy, hugely solvent, due to the value of those homes, but have very real liquidity problems, as the consequences of the tanking of annuity values kicks in over time.
    A problem set to worsen over the next 10-20 years as many of those who retired early with better pensions pass away.’

    Nail head on hit.

    Nice to see Yellen has ducked it one more time.

    • Hi Dutch

      Yes she did or 54-0 a better record than Floyd Mayweather as some wag has put it.

      Remember in the UK there is the tangled mess of the state pension which will rise by 2.5% next month due to the triple lock when inflation is officially 0%. The war of the generations again.

    • So the dilemma is:
      Raise interest rates and you’ll increase the spending power of savers, but this would render many home loans unsustainable, and show up on banks’ balance sheets, OR,
      Keep interest rates low, allow people to service their homeloans at values they should never have got near, but accept that this will continue to suppress demand, as no-one has anything but debt to spend, few can afford it and the insolvent banks are risk averse.

      Since the banksters own the political class, option number 2 will be chosen, regardless of its damage to the wider economy..

      Further, wages are only rising in “real” terms against inflation measures which do not give any insight into real-life inflation.
      Real-life inflation is, overall, higher, and I’d say, considerably higher, than either RPI or CPI, and that is not by chance.
      So for statisticians to record real-terms wage increases against those measures is also deliberately misleading.
      It hoists politicians by their own petard, because they see wages “growth” but little, if any, economic expansion.

      This is not a problem which is going away any time soon.

  7. Personally, I’m happy she refused to raise. Recent indicators show the US heading to significant slow down in growth rate in the next 3 months for at least another 6 months. She made the right decision.

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