Economic data favour Fed standing put on rates
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. –
Jared Bernstein feels the Fed will not raise rates.