Outlook for the Fed as US Data Disappoint

In December, the Federal Reserve was the most-talked about central bank in the world. As the Federal Open Market Committee (FOMC) met, they were questioned by economists against raising interest rates. This is because the economic growth had slowed down. To reinforce their independence, the officials decided to raise hikes and point to more rate hikes this year. This led to a sharp decline in the US stocks as investors moved to safe haven assets like treasuries and bank stocks.

In January, even before the members met they had changed the tone. In interviews and events, the officials, including the chair said that they would be flexible. This was interpreted to mean that the officials would not increase rates as they had projected. When they met, they released a statement saying that they will be patient.

This happened even as the US economy appeared to be firing on all cylinders. In December, the economy had added more than 300k jobs and the unemployment rate was still lower. In January, the economy added more than 300k jobs.

This month, the forecasted low growth picture has started to emerge. Last week, the OECD became the latest organization to lower the global growth forecast. Other organizations that have lowered this forecast are ECB, IMF, World Bank, and BOE. They have all blamed it on the global trade conflict and the uncertainties brought about by Brexit.

At the same time, data from the US appeared to be weaker than expected. The jobs numbers released on Friday showed that the economy added more than 20k jobs. This was much lower than the expected 180k. The unemployment rate dropped to 3.8% while the participation rate and wages increased. The trade numbers released last week showed that the trade deficit had grown to the highest level in 10 years. These numbers were followed by the inflation numbers released yesterday. The numbers showed that the core CPI rose by just 2.1%, which was lower than the expected 2.2%. The headline CPI rose by 1.5%, which was slightly lower than the expected 1.6%.

Therefore, these numbers reinforce the thinking that the Fed is likely to continue to hold interest rates at the current levels. They also show that there is a likelihood that next move by the Fed could be lower.

There is a ray of hope because the talks between the US and China appears to be progressing well. A deal is expected to be reached within a few weeks. The chart below shows the performance of the dollar index in the past few weeks.

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