Yesterday the Fed released the minutes from the July FOMC meeting, and while the language contained within suggested committee members consider the time for a rate hike to be drawing near, there was enough ambiguity to keep the markets guessing over when that point is likely to be.
By Peter Martin
Thursday, August 20, 2015
A key phrase in the text appears to be that of the participants in the discussion ‘most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,’ though others clearly had reservations about the projected path of inflation, with ‘some participants’ expressing the view that ‘the inflation outlook might not soon meet one of the conditions established by the Committee for initiating a firming of policy.’
This seems especially pertinent given CPI data also released yesterday that the Fed would not have been privy to at the time of the FOMC. The CPI rose just 0.1% in July, easing from the 0.3% gain seen in the month prior, and the slow pace was not driven by weak energy prices: the core CPI, which excludes the volatile components of food and energy, also increased only 0.1%. Year-on-year the headline CPI is just 0.2% higher than it was a year ago, remaining a huge distance away from the Fed’s 2% target. Given the further falls in oil prices we have seen since this data was collated and the continued strength of the US dollar, it is difficult to see where the Fed’s confidence of reaching its inflation objective in the medium term comes from.
Oil has moved lower again today, following Wednesday’s announcement of a 2.6 million-barrel build in US crude oil inventories during the previous week. US crude oil futures were down 0.10% at $41.19 a barrel by 9am in New York, having been as low as $40.50 earlier in the session — suddenly $50 a barrel seems a long time ago. Unless we see a big bounce in energy prices soon, this is going to prove to be a drag on market-based inflation measures for August.
One area that will be a source of encouragement for the Fed is the labor market, as jobless claims continue to come in at low levels. First-time claimants for unemployment insurance rose by 4000 last week to 277,000 — still a very healthy number by historical standards — though the four-week moving average was pushed up to 271,500 from 266,000 in the previous week. This compares quite favourably to how this metric was looking a month ago.
The main concerns that have threaded through the fabric of this week’s trading — namely the low price of oil and sliding Chinese stock prices — continued to weigh on the US stock market this morning and the leading stock indices opened in the red. Shortly after the opening bell on Wall Street, the Dow Jones was down 138 points or 0.79% at 17,211, while the S&P 500 Index fell 0.86% to 2061.3.
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