Raising interest rates — a primer
A summary look at market issues facing the Federal Reserve
Now that the outcome of the Federal Reserve’s next meeting has become far less certain, here’s a rundown of what would have to happen for Janet Yellen and company to raise rates on March 15.
Labor markets: Yellen n said the U.S. economy is close to a level consistent with full employment — part of the Fed’s dual mandate — but a number of labor-market indicators have taken a step back recently. Foremost among them: average hourly earnings, the employment cost index and the Atlanta Fed’s wage growth tracker.
The Fed will get three more readings on jobless claims after data Wednesday added to labor-market bullishness. But the central bank will likely need to see a strong rise in wage growth in the March 3 jobs report for it to lean toward hiking.
Inflation: Containing n price growth is the other part of the Fed’s mandate, but it’s spent the better part of the bull market trying to boost inflation back toward a 2 percent target. Yellen signaled she’s ready to play inflation cop again, but several measures will need to show improvement in coming weeks. Core personal consumption expenditure, or core PCE, has been below the Fed target since 2012, and recent monthly readings point to a slowdown in the bank’s preferred gauge of annual inflation. If that trend continues, March becomes less likely.
Other inflation measures have shown a healthier picture, with the consumer price index accelerating to 2.5 percent last month, and survey and market-based gauges of expectations turning more bullish to approach the Fed goal.
Analysts warn, though, that the details of the CPI report aren’t as strong as the headline figure, while the Fed itself said two weeks ago that breakevens remained too low to warrant tightening. Will another month at current levels influence policymakers?
The next PCE report is due March 1, while the CPI data won’t get an update until the morning of the Fed’s announcement.
Fiscal policy: In December n the promise of pro-growth policies from the Trump administration helped move the number of rate hikes deemed appropriate for 2017 to three from two — improving the odds for a March hike.
Since then, the White House has provided scant details on planned spending increases and tax cuts, while focusing instead on protectionist trade and immigration policies that could weigh on growth. The Fed has no choice but to wait for policy proposals before changing its estimates, Yellen said.
Business investment: n One of the Fed’s favored indicators for future economic growth is capital spending, a measure that the central bank said “remains soft.” Business confidence has surged since then, with indexes compiled by Morgan Stanley and Renaissance Macro Research affirming the improvement.