Eco­nomic data favour Fed stand­ing put on rates

The Myanmar Times - - Business -

TWO months ago, dis­agree­ments at the heart of the US Fed­eral Re­serve spilled out into the open, with pol­i­cy­mak­ers squar­ing off over the near-term threat of in­fla­tion.

And yet as the Fed­eral Open Mar­ket Com­mit­tee pre­pares to meet again to­day and to­mor­row to re­view in­ter­est rate pol­icy, wide­spread ex­pec­ta­tions are that, for a sixth con­sec­u­tive meet­ing, the US cen­tral bank will leave rates un­touched.

Since the last FOMC meet­ing seven weeks ago, the US econ­omy in the third quar­ter ap­pears to be weaker than Fed Chair Janet Yellen ex­pected when she said last month that the case for a rate hike had “strength­ened” con­sid­er­ably.

The pro­ducer price in­dex was flat and re­tail sales slowed in Au­gust. Signs of in­fla­tion were scant.

The key US fed­eral funds rate has been at or close to zero for a decade. The Fed’s hawk­ish vot­ing mem­bers be­lieve an in­crease should come soon to pre­vent over­heat­ing while its doves be­lieve this risks in­ter­rupt­ing a slow re­cov­ery.

“At one level, maybe the doves are beat­ing the hawks, but the facts are that the data are sup­port­ing stay­ing put,” said Jared Bern­stein, for­mer chief eco­nomic ad­viser to Vice Pres­i­dent Joe Bi­den.

Other ma­jor cen­tral banks are also wrestling with weak growth. The Bank of Ja­pan will also meet to­day and to­mor­row to re­view its in­ef­fec­tive stim­u­lus ef­forts. The Euro­pean Cen­tral Bank, which like the BoJ has re­sorted to neg­a­tive in­ter­est rates, left its poli­cies un­changed this month.

While likely hold­ing the fed­eral funds rate at 0.25 to 0.50 per­cent to­mor­row, the Fed could sig­nal in stronger terms that a rate hike is com­ing, if for no other rea­son than to pre­vent com­pla­cency in the mar­kets.

But ahead of the meet­ing, FOMC mem­bers have re­mained pub­licly at odds over what they should do.

A week ago, Bos­ton Fed Pres­i­dent Eric Rosen­gren sug­gested US had reached full em­ploy­ment and that “grad­ual tight­en­ing” could be ad­vis­able.

Days later Fed gov­er­nor Lael Brainard said the rate hik­ers’ case was the “less com­pelling” be­cause the down­side risks out­weighed the pos­si­bil­ity of an up­side shock.

Fel­low Fed gov­er­nor Daniel Tarullo sim­ply pre­dicted the talks would be “ro­bust” while the out­go­ing At­lanta Fed Pres­i­dent Den­nis Lock­hart said they would be “se­ri­ous”.

The flow of eco­nomic data in the seven weeks since the last FOMC meet­ing is with the doves.

“The ar­gu­ments among those who would raise are based on fu­ture pro­jec­tions that have proven to be wrong time and again,” said Mr Bern­stein.

De­spite steady monthly job cre­ation, which came in at a solid 151,000 new po­si­tions in Au­gust af­ter a soar­ing 255,000 in July, the unem­ploy­ment rate has re­mained at 4.9pc for three months, sug­gest­ing that full em­ploy­ment in slack labour mar­kets are still a ways off.

Signs of in­fla­tion so far have like­wise been un­con­vinc­ing. In July, the core per­sonal con­sump­tion ex­pen­di­tures price in­dex, or core PCE, stood at 1.6pc from the same month last year, still sig­nif­i­cantly below the Fed’s tar­get of 2pc.

In­deed, in a speech in Chicago, Ms Brainard noted that core PCE had un­der­shot the Fed’s tar­get for 51 straight months, mak­ing any trend dif­fi­cult to dis­cern. –

Photo: EPA

Jared Bern­stein feels the Fed will not raise rates.

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