FOMC Acknowledged Weak Consumer Spending, Risk In China And Greece
US Fed officials in June saw the economy moving toward conditions that would support an interest-rate increase, while also expressing concern about weak consumer spending and risks from China and Greece.
Members of the Federal Open Market Committee (FOMC) “saw economic conditions as continuing to approach those consistent with warranting a start” to interest-rate increases at some point, according to the 16-17 June meeting minutes released Wednesday. All members but one “indicated that they would need to see more evidence that economic growth was sufficiently strong.”
Fed officials in June forecast they would raise rates twice this year, while lowering their outlook for subsequent increases. Since then, global markets have been shaken by the rising risk of a Greek exit from the Eurozone and a Bear market in Chinese stocks.
Stocks and US Treasury yields lower after the release of the FOMC minutes.
Many members expected the economy to be near full employment by year-end if growth progressed as they expected. Officials in June expected the unemployment rate to average 5.25% in Q-4 of this year.
The FOMC minutes showed officials were cautious about the economic outlook. Their concerns include lingering consumer caution, and drags on investment and exports resulting from lower energy prices and a stronger USD.
Inflation continues to linger below the central bank’s 2% goal, and global turmoil is posing new risks.
Participants will get fresh readings on the Fed’s views of the economy when Ms. Yellen speaks Friday and delivers her semi-annual testimony to Congress next week.
US Treasury yields have declined as investors sought the safety of US debt. Yields on the U.S. 10-yr T-Note are down from 2.42% on 1 July.
The Shanghai Composite Index sank 5.9% Wednesday, extending declines from its 12 June high to 32%. Economists forecast 7.0% growth in China this year, the slowest in 25 yrs.
Financial turbulence in China has pushed down prices of commodities, including Crude Oil, which has given up its gains for this year. This week, a gauge of 6 industrial metals from Aluminum to Zinc fell to the lowest since July 2009.
Fed officials are keeping an eye on declines in materials prices for signals of slowing global growth and a more prolonged period of low inflation. Fed officials have missed their 2% inflation target for more than 3 years.
The Fed has held its benchmark interest rate near Zero since December 2008. While the median forecast for the rate this year was unchanged in June, 7 of 17 members of the FOMC now project either 1 rate increase or no increase in Y 2015, up from 3 in March.
FOMC participants had not seen the June jobs (NFPs) report at the time of their meeting. While job creation advanced, with the economy gaining 223,000 positions, wages stagnated and the labor force shrank.
Between now and 16-17 September when the next FOMC meeting followed by a press conference is scheduled, Ms. Yellen and the committee will see 2 more monthly NFPs and several new readings on inflation, housing and retail sales.
Fed officials will meet again on 28-29 July, no press conferences or forecast updates scheduled for that meeting.
Stay tuned…
HeffX-LTN
Paul Ebeling
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