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Looking at: the US Federal Funds Target Rate

Looking at: the US Federal Funds Target Rate

The US Federal Reserve target rate is one of the most influential interest rates in the US economy, and is applicable to the most credit-worthy institutions when they borrow and lend overnight funds to each other.

The target rate (illustrated by the red line in the below graph) has trended down over the past three decades, to a level of nil to 0.25 per cent (from late-2008). The two most recent interruptions to this downtrend – from 1994 and from 2004 – coincided with the jump in average hourly earnings (black line).

With US unemployment at January 2014 declining to 6.6 per cent, average hourly earnings have actually commenced their uptrend for the first time in a decade.  Does this indicate the US Federal funds target rate could be up to 2 to 3 per cent over the medium-term?

Screenshot 2014-02-11 17.30.12

London Business School economists, Elroy Dimson, Paul Marsh and Mike Staunton, have found the best proxy for underlying inflationary pressure is prevailing wage growth – as roughly two-thirds of corporate costs are from the labour market.

While various factors – including western world demographics, internet sales, industrial automation and global trade – have conspired to bring down wage growth (see graph below), readers may want to keep a close eye on whether the growth in US average hourly earnings continues over the next few years.

Growth in the wage component of the employment cost index is close to a 30-year low:

Screenshot 2014-02-11 17.45.38

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Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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