Fed likely to boost outlook, stay mum on rates
Labor market, stocks have rebounded, but global risks remain
Despite encouraging rebounds in both job growth and markets in recent weeks, the Federal Reserve is expected to maintain its poker face this week, offering few, if any, clues as to whether it will raise interest rates in September, economists say.
Fed policymakers are wedged between a recent upturn in economic and financial news and a lingering cloud of uncertainty. What is virtually certain is Fed policymakers won’t hike its benchmark rate at two-day meetings that conclude Wednesday. Fed officials also stood pat in June, highlighting a sharp slowdown in job gains in April and May and the United Kingdom’s looming Brexit vote on whether to leave the European Union. The Fed lifted its key rate in December for the first time in nine years but has held it steady since.
Since then, the labor market has bounced back resoundingly, adding 287,000 jobs in June. And while the U.K.’s affirmative Brexit vote bore out the Fed’s fears and drove down stocks, U.S. markets reached new highs last week before giving back some gains.
Yellen told reporters last month after the anemic payroll growth in the spring, “We need to assure ourselves that the underlying momentum in the economy has not diminished. I don’t know what the timetable will be to gain that assurance.”
It’s certainly not just one booming payroll report, experts say. Fed officials likely “will desire further evidence of labor market improvement before signaling ” an upcoming rate increase, Michael Gapen, Barclays chief U.S. economist, wrote in a note to clients.
Despite June’s strong job growth, average employment gains the past three months were just 147,000, Gapen notes. That’s well below last year’s average monthly additions of 229,000.
And while stocks have rallied and corporate borrowing costs have eased after initial post-Brexit jitters, “it is likely too soon for Fed officials to signal the allclear,” Goldman Sachs says in a research note. “Brexit may have raised (economic) uncertainty.”
The Fed is also at a disadvantage because the Commerce Department is slated to announce second-quarter economic growth Friday, two days after the release of the Fed’s post-meeting statement.
Economists believe strong consumer spending drove growth near a healthy 3% at an annual rate after a feeble performance the previous two quarters. But policymakers likely want to see the hard data.
The Fed’s statement Wednesday is expected to acknowledge the rebound in job growth and the more favorable markets, says Vincent Reinhart, chief economist at Standish Mellon. That, he says, would leave the door open to a September rate increase. Markets are giving just 20% odds of a September move, but Gapen predicts it’s likely if payroll reports for July and August are both strong.
Reinhart, however, believes most Fed officials now expect to raise rates just once this year, below their June forecast of two hikes, amid a sluggish global economy that has some foreign central banks pushing rates further into negative territory.
“If they wait until December, they’ll get a free look at the (U.S.) presidential election results” — another source of market uncertainty, Reinhart says.