In Latin America, we live in expectancy of the news on interest rates in the United States. The exception is Peru, where it seems that the news that gears public opinion is next year's elections. The reason why we are interested in this is because a raise in the basic interest rate to more normal levels will increase the cost of our debt but will also sharpen the trend for lower commodities prices. These increased starting in 2003 and then again after 2008, when the FED funds rate ceiling fell to 0.25%, which with an inflation rate of 2%, left us with a real interest rate of -1.75%, turning our savings in dollars into loss makers but turning loans into a great gift.

For those young enough to never have seen negative interest rates in dollars, this only happened once before, after the oil crisis of the 1970s.  At the time, it led to high public indebtedness for the development of infrastructure and public expenditure given money went for free and there was nothing to be lost, it seemed. What followed the negative rates of the seventies was the historically high record of US interest rates that reached 20% in 1981, bankrupting everything and everyone on the way, including various theoretical visions; socialist countries and developing economies: and companies, both US and foreign.

Now, after seven years of negative rates, the longest continuous series in US monetary history and almost fifteen years in all including the positive intervals between 2003 and 2007, it appears that the US economy may attempt to return interest rates to normality. The historically normal FED Funds rate is equal to 5.95, average between 1971 and 2015. The key indicator to raise the rate is employment.

Employment in the United States is measured differently from Europe, where someone who has no work is unemployed. In the United States someone who does not have a job gets unemployment insurance during a short period while actively seeking work during the last four weeks. If the unemployed person stops seeking work, the statistic of the unemployed disappears. The person is no longer “unemployed” but “does not work”, which isn't the same. If the person stops looking for work, unemployment insurance ceases. The unemployment insurance covers 26 weeks of a year and this is the maximum that one can ask for, although it might vary by State.

The share of the total US labour force employed in September of 2008 was 66% of the total workforce, defined as all those who were of working age, in the United States. As of December of 2014 the population employed was reduced to 62.7% of the work force. In this way unemployment in August of 2008 was calculated over 66% of the workforce and in December of 2014 over 62.7%. Thus, it is not the same thing to say that the unemployment rate fell between 2008 and 2014 if we must add 3.3% of the population that was unemployed who stopped looking for work because they didn't find it and were discouraged. When one reads that the rate of unemployment in August of 2014 was 6.1%, we have to add 3.3% more to make it comparable with the situation in September of 2008. According to the Bureau of Labor Statistics then, in August of 2014, unemployment includes this 3.3% of contraction from the work force, adding up to 9.4% versus 6.1% in September of 2008. There is less total unemployment, including those who are not looking for work due to discouragement in 2014 than in 2008. Adjusted for August of 2015, this changes from 8 million unemployed who are looking for work plus 6 million “not employed” who are looking for work that must be added in. This increases real unemployment in the United States by 80% and this data is closer to what one sees in the streets and in social protests. 

Source Bureau of Labor Statistics seen 17 September 2015.

http://www.bls.gov/news.release/empsit.t11.htm

http://www.bls.gov/news.release/empsit.t16.htm

http://data.bls.gov/pdq/SurveyOutputServlet

http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=LN_cpsbref1

The data in the box show a reduction from August 2014 onwards but they are almost 80% larger than the official data that only considers those from category (a).  The phenomenon is that the persons become discouraged and stop looking for work in order to support themselves with any job in the informal economy. Unemployment insurance covers 26 weeks in a year and is only a fraction of the unemployed person's wage. Thus they move from the category of unemployed in the work force to the category of out of the workforce, even if they respond to the surveys of the Bureau of Labor Statistics that they want to work. The same thing happened in the Latin American economies in the 1980s.

In the framework of 9.4% of the workforce looking for work in August of 2008, the FED funds rate ceiling was reduced from 5.25% in late 2007 to 0.25% in December 2008. There are no employment conditions to return rates to their normal historical levels, unless the new normal level of unemployment were to be 8.5% of the labour force. What is not measured is how much of this workforce has been substituted by illegal migrants with infinitely lower wages. These are good reasons for not having raised the basic interest rate ceiling on September 17, nine quarters after the first announcement of Bernanke that interest rates should be raised but "not now" in June of 2013.

The mirror of this high level of total unemployment, not including informal migrants, is the dynamic of consumption. Historically growth in the US economy has been consumption led. The problem is that currently consumption growth is fragile and volatile, with a downward trend since 1980, as one can see in the graph below.

US: personal consumption growth rate

Source: BEA

In order for the Federal Reserve to be at ease with the economic recovery, consumption growth should return to rates similar to those of the 1990s. The recovery is still weak in 2015.

The other side of this argument is that interest rates can remain negative in real terms for longer. The reply is that while expectations remain that they are going to rise, the financial effects are the same, as we have seen with commodity prices, exchange rates, stock indices and the rates of growth of the GDP in emerging economies. The United States without doing anything, has lowered the prices of raw materials and energy, has a capital cost close to zero and a strong dollar.  Someday interest rates will rise, whatever happens. The positive side is that when this happens, it will no longer matter much to the emerging economies because the damage is already done. The only new effect will be reserve loss, which has not happened yet.

(Translated for ALAI by Jordan Bishop and the author)

- Oscar Ugarteche, is Senior Researcher with the Instituto de Investigaciones Económicas UNAM, member of SNI/CONACYT, Coordinator of the Obela project.