While select officials at the Fed see short-to-mid-term acceleration in inflation as sufficiently robust to support a cautious and gradual increase in borrowing costs, the overall picture is more complicated.
The report also showed that the United States of America unemployment rate ticked down to 5.1% last month from 5.3% in July. The Fed is legally charged with promoting job growth and stable inflation, and for many there is a conflict right now between the employment and inflation environments. A looming rise in inflation is anything but certain. 60% of economists surveyed by Bloomberg are still looking for a rate hike but Fed fund futures are pricing in only a 30% chance of a move.
Second, price stability: If inflation is low, it means quite simply that prices have not risen. This overwhelming strength was driven by a strong labor market <strong>reportstrong>. Former U.S. Treasury Secretary, Larry Summers, said that there are “major uncertainties coming out of China” and then made it clear this is not the time to move the interest rates. The likely strengthening in the dollar would also hamper U.S. growth, he said.
The dollar was down 0.4 percent at 121.25 yen after rising to the week’s high of 121.76 on Friday following the Fed officials’ comments that kept prospects of a September hike alive. Adjusting interest rates and the money supply is insufficient to deal with fiscal issues, such as federal debt and income inequality.
The Fed is set to meet Wednesday and Thursday next week to decide what to do with its near-zero short-term interest rate target.
EUROPE FALLING: Britain’s FTSE 100 fell 1.4 percent and France’s CAC 40 dropped 1.6 percent, while Germany’s DAX was down 1.2 percent. But if we wait, we not only get faster growth, we get the rapid liftoff of rates that we’d need to avoid the no-mans land problem discussed above. “You could see kiwi getting a bit of a boost temporarily”. Ultra-low rates have been a boon for stocks. The rate hike would have symbolic importance, they feel, because it would send a signal that the Fed is consciously moving to prevent future excesses. Conversely, however, the rate hike has a disproportionate impact on the import/export equation, as the dollar simply becomes more attractive than it already is. The figure was broadly expected but underlines the challenges facing the European Central Bank in bringing inflation back toward its 2 percent target. The number of American jobs has increased, but it is the quality of those jobs that is in question.
We take a very simplistic view of the discussion; namely, if the nation were fully employed, there would be upward pressure on wages and income. In the August poll, it had been forecast averaging 1.7 percent in 2016. Wall Street closed flat on Friday after a tumultuous week in which the Dow slumped more than 1,000 points at one point last Monday. Most economists would agree that wages have not recovered from decreases incurred during the 2008-2009 recession.
The meetings are Wednesday and Thursday and the policy-setting Federal Open Market Committee will issue a statement at 2 p.m. Thursday.
After a relatively placid seven months, markets turned violent in August as investors fretted that a slowdown in China would reverberate globally, and as anticipation built over the Fed’s first rate hike since June 2006. With the Fed’s additional bank supervision powers, it seems odd to suggest that a crude instrument like monetary policy should be used to deflate speculative bubbles.
Russell is managing director of Cove Hill Advisory Services.