Economists have begun commenting on the economic fireworks from this morning, and in a note, Chris Rupkey, Chief Financial Economist at Bank of Tokyo-Mitsubishi UFJ said, “the world looks to be a safer place today.”
This morning, the European Central Bank cut interest rates, taking its deposit rate negative to -0.1%.
The benchmark interest rate was also cut from 0.25% to 0.15%.
But perhaps more importantly, Draghi unveiled a package of targeted longer term refinancing operations, or TLTROs. The initial size of these operations is EUR 400 billion and will mature in September 2018.
In the U.S., weekly jobless claims rose slightly to 312,000 from 300,000 last week, but the four-week average of claims has fallen to its lowest level since 2007 as the labour market in the U.S. continues to show improvement.
In his note, Rupkey says the U.S. economy appears to be rounding into form.
“Good news this morning on the labour market, current conditions. We don’t see the slack economic conditions that Fed officials see, and unemployment claims don’t either. Current conditions could not be any better. First-time jobless claims rose slightly by 8K to 312K in the May 31 week. These are levels we tend to see during robust economic expansions, where any job losses are modest frictional ones in a normal, growing $US17 trillion economy. Unemployment claims are better than they were in April. In the five weeks of May, claims have been below the 325K level that defines the ‘full employment’ unemployment zone, claims have been 325K or lower in 4 out of 5 weeks in May, and the outlier was 327K. This is evidence, anecdotal to be sure, that we could get a big 200K plus payroll jobs tomorrow.”
Rupkey says it might be time for the Fed to start normalizing monetary policy, given the employment and inflation situations in the U.S.
” The Fed has told us the Fed funds rate should be 2.25% when unemployment hits 5.2-5.6 per cent, and at 6.3% unemployment right now, they better get going. The economy is better than you think. The ECB may be worried about deflation over there, but the Fed has won the battle here. There is no deflation in the U.S. The labour markets are closing in on full employment, and rate hikes are coming faster than you think.”
We will see how this plays out, but it is certainly showtime for the U.S. economy.