All are expecting a dovish Fed statement at the conclusion of its two day meeting.  Many are perplexed by the lack of wage inflation given the low unemployment rate.  Will the Fed address the labor participation rate (LPR) as a primary cause, a rate that is still considerably lower than its long term average but nominally higher than its record lows experienced about two years ago?

Speaking of which President Obama’s former head of Economic Advisors did some great work discussing the LPR and the high unemployment rate of American males.  Alan Krueger who unfortunately took his life earlier in the week, did pioneering work between unemployment, welfare payments and opioid addiction.

Krueger’s work confirmed what most people already know…handouts damage self-esteem and the perception of self.  His work concretely stated males greatly identify with their jobs and handouts damages their proverbial animal spirits.

Krueger also found the nearly half of working age men outside of the labor force took pain medication (aka opioids) on a given day.


In Fed meetings past, the Committee did discuss the impact of the opioid epidemic and its impact upon wages and growth.

Most economists will state the rate of growth of wages has been the single best guide to Fed policy for many years.  According to Pantheon Macroeconomics, it is generally accepted a good first approximation for the funds rate has been the rate of growth of hourly earnings multiplied by 2.6x minus 5.  Right now this model says the funds rate should be about 3.8%.  Today the overnight rate is 2.5%.

I will argue if the LPR does not increase, wages will begin to rise.

There are two types of inflation…demand pull which is product and cost push which is wages.  Cost push is more detrimental to an economy.

Will the Committee make any comments?

To write the obvious all will parse every word and nuance.  The FOMC will make an announcement at 2:00 P.M.

Commenting upon yesterday’s market activity, equities faded after a report that US and China remain at odds on some aspects of a trade deal.

Last night the foreign markets were down.   London was down 0.10%, Paris down 0.16%  and Frankfurt down 1.28%.  China was down 0.01%,  Japan up 0.20% and Hang Sang down 0.49%.

The Dow should open mixed ahead of the outcome of the Fed meeting, awaiting further news about trade.  The 10-year is up 4/32 to yield 2.60%


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.