From Commerzbank via Forexlive:
- Fed will no doubt again leave interest rates unchanged at this meeting
- Is likely to start taking action in September … the only probable obstacle would be disappointing economic data in the interim. Or external developments – such as a renewed flaring up of the Greek crisis or a slump in China’s economy – the seriously darken the economic outlook,
- The economy is performing more or less as the Fed expects
- The hurdle to be cleared in order for this step to occur is not very high
- There have been clear signals lately that a change of course is imminent
- Notes Yellen comment from July 15:
“We are close to where we want to be and we now think that the economy cannot only tolerate but needs higher rates”
On GDP:
- We expect second-quarter US growth to come in at 2.3%
- The chances of growth picking up in the second half of 2015 are good
Labour market
- Yellen has stressed repeatedly, however, that when assessing the situation on the labour market the Fed considers not just the unemployment rate but other factors as well
- the combination of a very large number of job vacancies and restrained job market turnover indicates that employers are not able to fill the jobs available quickly
- Part-time work for economic reasons (those wanting to work full time but unable to for lack of corresponding jobs) is admittedly still well above the pre-crisis level.
Inflation
- The Fed expects, core inflation – measured by the consumer spending deflator excluding energy and food – is to rise to 1.3% to 1.4% by the fourth quarter
- One pointer to higher inflation is producer prices for final consumer goods products, excluding energy and food, which recently rose at a rate of 3% year on year.
- The employment cost index is one indicator which is clearly pointing upwards
There’s no doubt that the Fed would like to raise rates now. However, there are strong reasons for caution:
- oil is headed lower than the early year slump and any producer price pressure is about to reverse sharply;
- labour cost rises are still very narrow and nascent, the odds of a wage push breakout are zero, and households need more income to consume anyway, and
- a Fed hike will scare the bejesus out of emerging markets and make China’s stabilisation job much harder.
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If I were the Fed operating on its brief I would wait.
