Scepticism mounts over Fed rate hike
Investors are keeping fingers crossed despite positive signals from Janet Yellen
new york — While Janet Yellen and her Federal Reserve colleagues are poised to raise interest rates at their meeting this month, investors increasingly doubt the central bank’s projection for additional hikes following soft reports on US employment and inflation.
Goldman Sachs Group on Friday pushed back its forecast for a third rate increase this year to December from September. Trading in futures contracts shows odds of a September increase have dropped to just one in four, and investors are now pricing in less than one rate hike in 2018 for the first time since the eve of the US elections in November.
Fed officials speaking on Friday expressed no disappointment with the payrolls gain of 138,000 last month, which was below economists’ expectations. Philadelphia Fed President Patrick Harker called it a “good number,” while Dallas Fed President Robert Kaplan said “if we are not at full employment, we are moving closer.”
“I’d be very surprised if they didn’t hike in June, given all the signals that they have sent,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore. While he still expects two more interest-rate increases this year, the probability has increased that the Federal Open Market Committee will move only
I’d be very surprised if they didn’t hike in June, given all the signals that they have sent Jonathan Wright, an economics professor at Johns Hopkins University
in June, he said. The Labour Department report showed the jobless rate fell to a 16-year low of 4.3 per cent, which is below the level the FOMC estimates to be full employment. Monthly payroll gains are averaging 162,000 this year, a step down from the 2016 pace of 187,000. Average hourly earnings rose 2.5 per cent from a year earlier, indicating a tightening labour market hasn’t brought an acceleration in wages.
The FOMC, last raised rates in March and at the time projected two additional increases this year and three in 2018. Those quarterly forecasts will be updated this month.
“The Fed has little credibility,” said Ward McCarthy, chief financial economist with Jefferies LLC in New York. Investors expect “the Fed to again back away from raising rates at minimal provocation. That is the legacy of the FOMC rate hikes underachieving relative to FOMC projections for so many years.” If Yellen decides to push forward in September, the FOMC may be forced to engage in a “public campaign” of fairly explicit signals for a rate hike similar to what occurred in March, he said.
The Fed’s Beige Book on Wednesday cited a variety of anecdotes of worker shortages and isolated pay raises across the central bank’s 12 districts. There was a manufacturer in the Chicago region raising pay 10 percent to attract workers. In the Atlanta district, construction work was delayed because of an inability to fill positions. In the Cleveland area, a transportation firm gave drivers a raise amounting to 7.5 per cent to retain them.
Yet overall, there’s no sign the tightening labor market is lifting inflation, which has been under the Fed’s 2 per cent target for every month but one for the last five years. The Fed’s preferred measure of prices, excluding food and energy, rose just 1.5 per cent in April from a year earlier.
The data point to an “unbelievably weak response” of wage growth to the jobless rate, said Anthony Chan, chief economist with JPMorgan Chase & Co’s Chase Private Client unit and a former Fed economist. He reduced his forecast for rate increases in 2018 to two from three.
Fed Governor Lael Brainard on Tuesday warned that the softening inflation could cause her to reassess the outlook for policy if it persists.
deputy chief executive and general manager of Apicorp.
Dr Bassam Fattouh, energy sector specialist and external advisor to Apicorp, said budget deficits and tightened public expenditure are a reality across the region. “However, our research suggests that governments still prioritise critical investments in their energy sectors — some of them to maintain their position as global energy suppliers, some of them in response to local energy supply shortfalls.”
The recent drop in oil prices, from around $56 per barrel at the start of March to just over $50 at present, is unlikely to prompt oil producers to have a rethink on their investment plans, according to oil and gas industry analysts.
While oil prices are still above their average of $45 per barrel recorded last year, most oil exporting countries are also now in a much better position following two years of strict austerity measures to confront a prolonged period of low oil prices, they argued.
According to Apicorp, Saudi Arabia and Iran represent 37 per cent of planned Mena energy investments, with $124 billion and $103 billion, respectively, over the outlook period, as both countries look to boost their upstream oil and gas programmes.
Saudi Arabia has concrete plans to increase gas production and to promote the role of gas in its energy mix — it is currently diverted entirely for domestic use in power generation and industry. Additionally, the country has a large number of projects in the pipeline to add significant power-generating capacity. Major projects include the Taiba integrated-solar combined-cycle plant in Madinah which will bring total capacity of 3.6GW by 2020 at an expected cost of $4 billion.
For Iran, total planned investments are $103 billion, of which the majority will go towards oil and gas projects. This highlights the country’s desire to boost its oil and gas sectors. Major projects include the $4.5 billion Kish gas development and the $8.5 billion Iran Gas Trunkline — currently at the design phase — that plans to connect Iranian gas to Europe via a proposed pipeline to Turkey.
Iraq is planning to invest $52 billion in energy projects by 2021 while planned projects in Kuwait stand at $60 billion with over 50 per cent in the oil sector. Egypt has plans to invest $83 billion in the energy sector with the power sector representing 75 per cent of the total, Apicorp said.
The power sector accounts for the largest share of investments, at $207 billion. The oil and gas sector will represent $195 billion and $159 billion respectively, with the remaining investments in petrochemicals. Projects under study represent by far the largest portion of planned investments at $282 billion.
“Given the current investment climate and uncertain outlook, we do not anticipate that all projects under this phase will move to the execution phase. In our view, contracts under design and execution phases are more likely to materialise in the medium term. Projects under execution amount to $125 billion, while those under design reach $78 billion,” the report said.
— issacjohn@khaleejtimes.com