Things Are Not Going The Fed’s Way
This is what to look for when the Federal Open Market Committee (FOMC) releases its policy statement at 2:00p EDT Wednesday in following its 2 -day meeting in Washington, DC.
Economists, participants and traders do not expect a rate rise, but they will parse the statement for clues on what the FOMC could do at its December meeting, speculators are betting the Fed will delay until next year.
The latest economic data has been mixed since officials met last month, when they left their benchmark federal funds rate at Zero+.
Numbers on US jobs, retail sales, manufacturing, inventories and exports disappointed, while new jobless claims and housing data showed continued strength. The challenge for policy makers is to keep their options open for a move this year, while acknowledging soft data that could tilt the tone of the statement toward a 1st raise in Y 2016.
There is no scheduled press conference after Wednesday’s meeting for more guidance, though Chairwoman Janet Yellen will testify on 4 November before the House Financial Services Committee. That hearing is on regulation, the questioning might extend to monetary policy, and it might not.
Fed watchers will examine the FOMC description of the pace of economic growth, the labor market and global economic conditions for hints on whether the committee has enough confidence in their outlook for US growth and higher prices to raise rates in December for the 1st time since Y 2006.
Notably, the 1st sentence of the last 3 FOMC statements described the economy as expanding “moderately” or at a “moderate” pace.
The Big Q Wednesday is whether moderate growth gets put down to modest.
The See-Saw pattern of economic growth has complicated policy makers’ decision making. Colder-than-normal temperatures caused US GDP to almost stall in the 1st Quarter, which was followed by a 3.9% annualized growth rate in the next 3 months.
Economists surveyed estimate the economy expanded at less than 50% of that pace in Q-3. The Atlanta Fed’s unofficial forecasting tool, GDP Now, puts Q-3 GDP growth at a 0.8% pace. The !st official estimate for the Quarter, from the US Department of Commerce, will be published Thursday.
The committee may find it harder to look past recent bumps for the labor market. Monthly gains for NFPs (non-farm payrolls), which had averaged 250,000 from November 2014 through July, dropped to 136,000 and 142,000 in August and September.
The FOMC will almost certainly feel it necessary to modify language from the last statement that noted “solid job gains and declining unemployment.”
I will be looking to see if they acknowledge the recent slowdown in the pace of hiring and how they characterize it. The more they emphasize the most recent reports, the less likely a December rate move happens.
Several Fed officials, including San Francisco Fed President John Williams and New York Fed chief William C. Dudley, have already begun arguing that 100,000-150,000 new jobs a month is sufficient for stable growth.
Sounds like Fed spin to me…
They have to be very careful in here, the Fed is already trying to change the perception of job gains. Savvy observers are not buying into the jawboning.
Another Key test is how the committee describes conditions outside the US.
When the FOMC met in September it was close to a rate rise. Officials balked on concerns that the slowing of the Chinese economy, and the resulting turmoil in financial markets, might crimp the outlook for growth and inflation in the US.
While the reference to financial developments may disappear because markets have calmed, the Fed may find it hard to make any substantive alterations to the rest.
While 13 of 17 FOMC members indicated in September they anticipated a rate increase in Y 2015, investors currently put the chances of that at about 35%. That calculation is based on pricing in fed funds futures contracts and assumes the effective funds rate will average 0.375% after an initial lift.
Things are not going the Fed’s way, so…
Stay tuned…
HeffX-LTN
Paul Ebeling
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