Lively debate on US rate rise expected

Interest rate hike seen as certain but not imminent

THE US FEDERAL Reserve is set for a lively debate in the coming week and could give a clear signal of an interest rate rise to come, even if it follows market expectations for a pause this month.

Both the European Central Bank and Britain’s Bank of England kept monetary policy unchanged this month, although both with a bias towards further easing action later in the year.

The Fed is expected to follow suit, but with a bias in the opposite direction.

Atlanta Federal Reserve Bank president Dennis Lockhart, viewed as a centrist voice, said in the past week that current economic conditions warranted serious debate.

“If 1.6 percent inflation and 4.9 percent unemployment were all you knew about the economy, would you consider a policy setting one tick above the zero lower bound still appropriate?” he said, referring to the core Personal Consumption Expenditures price index, the Fed’s preferred inflation measure.

“I think circumstances call for a lively discussion next week,” he said.

Economists polled are increasingly expecting an interest rate increase this year, but only in December.

News conference

The Federal Reserve’s Open Market Committee (FOMC), which last raised borrowing costs in December 2015 to end seven years of near-zero rates, meets tomorrow and on Wednesday, with a news conference by chairwoman Janet Yellen due on Wednesday.

Several Fed officials have said strong payrolls numbers – averaging above 200 000 in the last three months – are cause for action as early as September. However, data in recent weeks have shown signs of weakness, including Institute of Supply Management surveys showing a decline in new orders and production in US factories in August and service sector activity at a six-and-ahalf year low.

The past week’s data included retail sales falling by more than expected last month and producer prices, a sign of future inflation, unchanged.

“The general tone of activity data over the last two weeks is not really enough to swing the doubters into rate hike territory,” said James Knightley, a senior economist at ING. “If activity is not strong and inflation is non-existent then it seems just a little bit tricky to justify higher rates.”

Fed governor Lael Brainard also hardened the view that the Fed would leave rates unchanged by saying that the central bank should avoid removing support too quickly.

Vulnerable

Brainard said she wanted to see a stronger trend in US consumer spending and evidence of rising inflation before the Fed raises rates, and that the US still looked vulnerable to economic weakness abroad.

Harm Bandholz, the chief US economist at UniCredit, said he expected a rate rise soon – but not in the coming week.

“I also think there will be a bit of a compromise, meaning no action but a clear hint… that there will be one hike later this year,” he said.

He believed that hint could come either in the statement, chairwoman Janet Yellen’s comments or in the “dots” indicating FOMC members’ view on the key Fed funds rate.

BNP Paribas, by contrast, said the market had given greater weight to dovish comments because they were more recent. – Reuters