If the financial markets were unsettled by the Fed’s decision to leave rates unchanged at the September FOMC meeting, there has been plenty of follow up from Fed officials recently to placate those concerns.
By Peter Martin
Monday, September 28, 2015
Friday’s rebound in the US dollar was spurred to a large degree by comments made by Fed Chair Janet Yellen late on Thursday suggesting a 2015 lift-off is still in play. Her assertion that ‘most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year’ offered more conviction than the official Fed statement from the September meeting and she also appeared to stress more heavily the transitory nature of current drags on inflation, providing a full explanation of why the FOMC expects a return to target inflation with time.
These comments were backed up by New York Fed President William Dudley on Monday morning, who said that there are no significant worries over financial stability at the moment, that the economy was doing ‘pretty well’ and that a continuation on this path would make a strong case for an interest rate rise later this year.
While inflation is still heavily depressed, there were some signs of firming in figures released on Monday. The PCE price index was unchanged at the headline level in August, but the core rate (which excludes the more volatile components of food and energy) increased 0.1%. Year-on-year, this keeps the headline PCE index at just 0.3%, while the core rate ticked up to a yearly change of +1.3% from +1.2% in July. At the same time, income and spending are both showing healthy increases. Personal income rose 0.3% in August, while July was revised up to +0.5% from the originally-reported +0.4%. Consumer spending, one of the bedrocks of US GDP growth, jumped a stronger-than-expected 0.4% in August, following an upwardly-revised 0.4% increase in July. This report certainly backs up the FOMC view that the economy is on a firm footing. A pick-up in inflation in September might just give the Fed enough evidence to justify lift-off — it’s worth noting that the PCE Price data for September will not be released until after the October FOMC meeting (the only remaining meetings this year are in October and December).
Despite the relatively upbeat tone of Mr Dudley’s comments, the market still appears to have beset by uncertainty regarding the timing of the rate hike, judging by the weakness of the stock market at the open. Shortly after the opening bell in New York, the Dow Jones was down 112 points or 0.69%, while the S&P 500 Index dropped just over 1% to 1912.0.
Another issue that is slowly drifting into focus, is the impending deadline for budget talks in Washington, alongside John Boehner stepping down as House Speaker. Mr Boehner’s resignation is seen as improving the chances of pushing through a temporary funding measure and therefore decreasing the chances of a government shutdown in October. Unfortunately this could lead to a debt-ceiling deadlock re-materializing with a vengeance in December which could serve to handcuff the Fed. It will make interesting viewing to see how things play out in the next few months.
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