US data on the mend, but Fed looks likely to hold its fire on rate in­crease


Ev­i­dence is pil­ing up that the U.S. econ­omy is re­bound­ing from the past few months’ stall, with con­sumers spend­ing more, a re­bound in job cre­ation, and wages be­gin­ning to rise.

But an­a­lysts be­lieve that the Fed­eral Re­serve will want to see more when it meets in the com­ing week to again weigh hik­ing in­ter­est rates.

The Fed­eral Open Mar­ket Com­mit­tee (FOMC) meets on mon­e­tary pol­icy on Tues­day and Wed­nes­day, about the very time that, a year ago, it ex­pected to be an­nounc­ing a rise in its bench­mark fed­eral funds rate.

The rate has sat at an ex­traor­di­nar­ily low 0 per­cent since 2008 in an ef­fort to rebuild the U.S. econ­omy from the Great Re­ces­sion with a flood of cheap dol­lars.

Per­sis­tent un­der­em­ploy­ment, ex­tremely low in­fla­tion and weak wage growth has kept the rate in place, with the Fed wor­ried the econ­omy could still be vul­ner­a­ble to tighter mon­e­tary con­di­tions, six years af­ter the re­ces­sion ended.

The sur­prise eco­nomic con­trac­tion of the first quar­ter put any ac­tion on hold, though the FOMC has said that it views the causes of the stall of the past few months as “tran­si­tory.”

Since April, though, key data which the FOMC looks at to de­cide whether the econ­omy can han­dle higher rates — in­fla­tion, em­ploy­ment and wages — have all shown signs of im­prove­ment.

Fed Chair Janet Yellen has re­peat­edly stressed the need for signs of firm tight­en­ing in the jobs mar­ket, even if in­fla­tion stays low.

Re­leased on June 5, the May job cre­ation re­port was sur­pris­ingly strong, with the jobs mar­ket ab­sorb­ing a surge of re­turnees, and wages turn­ing up at the same time, all signs of tight­en­ing.

Good New Num­bers

Data this week backed that up: job va­can­cies rose and em­ploy­ers said they are and ex­pect to be pay­ing peo­ple more.

But the other data is mixed. Con­sumer spend­ing has risen, but mainly on cars; oth­er­wise, U.S. shop­pers seem very cau­tious.

Prices are weaker than the Fed — which wants to see in­fla­tion around 2 per­cent — fa­vors.

An­a­lysts say that be­cause the FOMC needs to see steady im­prove­ment over time, it will likely wait a cou­ple months more to move, even if Fed pol­i­cy­mak­ers seem anx­ious to get past the ini­tial in­crease.

“The June FOMC (pol­icy) state­ment will largely be a place­holder for what we con­tinue to be­lieve will be a Septem­ber rate hike,” Deutsche Bank said Fri­day.

“A June rate hike is not en­tirely off the ta­ble, but is highly un­likely. Septem­ber is more likely, but that first hike is data-de­pen­dent,” said econ­o­mists at IHS.

Nor­mal­iz­ing Hikes Down the Line

When it does, it will likely be the first in a se­ries of in­creases aim­ing to “nor­mal­ize” U.S. mon­e­tary pol­icy, the Fed says.

That prospect has driven volatil­ity in global mar­kets for two years now, push­ing the dollar higher and spurring cap­i­tal flows out from emerg­ing mar­kets, which has left many strug­gling to shore up growth.

Partly for that rea­son, in the past two weeks both the In­ter­na­tional Mon­e­tary Fund and the World Bank have en­cour­aged the Fed to hold off rate in­creases un­til 2016.

Wor­ried about the im­pact of higher in­ter­est rates on poorer coun­tries, the IMF said the Fed “should re­main data-de­pen­dent and de­fer its first in­crease in pol­icy rates un­til there are greater signs of wage or price in­fla­tion than are cur­rently ev­i­dent.”

“Bar­ring up­side sur­prises to growth and in­fla­tion, this would put liftoff into the first half of 2016.”

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