Jia Liu, PhD
Articles from Jia Liu, PhD
Stocks are well known for their high volatility. Stocks respond to financial, economic, and political events in real time. The recent Brexit vote, for example, caused a sharp drop in stock prices. But the U.S. stock market was able to rebound in several days.
Going forward, it is certain that stock markets will be sensitive to events like the upcoming Federal Open Market Committee meeting (July 26-27), the ongoing presidential election, oil shocks, and so on. But it is far from certain whether we can predict future stock returns. However, an index, called VIX, may surprise investors.
The disappointing performance of the global financial markets this year has left many investors looking for better opportunities. Therefore, an investment like Bitcoin may catch their eyes. After all, its price has jumped from about $430 in January to about $660 today (July 14), a growth rate of slightly more than 50 percent
The Labor Market Conditions Index has fallen into negative territory, and continued to fall since January this year. This indicates that the labor market may be worse as a whole than the individual measures show. The disappointing May jobs report may be not an outlier, but may instead be starting to capture a worsening labor market.
The market strongly expected that the Fed would hold interest rates steady in its April meeting. The result was consistent with public expectation. Now the bigger question is whether a rate increase will occur in June, the next FOMC meeting with a news conference and a release of economic projections.
With the recent market turmoil and the plunge in oil prices, as well as no meaningful evolution in economic conditions, the Fed’s decision today was not difficult to make. Lower oil prices and weak global economic growth would make the Fed more cautious about its tightening policy. The second interest rate increase in March has become unlikely.
Fascinating as the free fall in the stock prices might be, stock prices are not directly relevant to consumers. The Consumer Price Index, released on Wednesday, sheds light on the prices that households experienced in December 2015. Most goods were cheaper, while services were more expensive. Consumers were paying more for services than for goods, which is consistent with the trend over the past 20 years.
In a recent article, the Wall Street Journal reviewed what economic forecasters got right and wrong in 2015. Among what they got wrong is the inflation forecast. In December 2014, Fed officials forecast an inflation rate of between 1 and 1.6 percent, but it turned out to be only 0.4 percent by November (December inflation numbers are not known yet). But this may not be quite as big a failure of forecasters as it seems, because there is more than one way to look at inflation.
Normally, raising interest rates is a form of a contractionary monetary policy, meaning that the central bank believes the economy is overheated or strong enough, so that higher rates are necessary to prevent future excessive inflation. But this is not the case today. Inflation has been stubbornly low in the past few years, which is a big concern for the Fed. The FOMC today continued to lower its projection for inflation in the short term.
The Federal Open Market Committee, the policy making arm of the Federal Reserve, explicitly points out in its October meeting statement that it will assess economic progress to determine whether it will raise the interest rate at its next meeting. The committee chose that language instead of saying “determine how long to maintain this target range” as it always has. The market took it as a signal of a December liftoff.
Given the fact that the U.S. economy is cooling down and other central banks are lowering interest rates, some might be curious about why we are even talking about raising interest rates.