Daily Management Review

As Near-Term Risks Diminish Fed Begins Crawl Towards Rate Hike


07/28/2016




As Near-Term Risks Diminish Fed Begins Crawl Towards Rate Hike
While stopping short of signaling that the move could come as soon as September, Federal Reserve policy makers took a step toward raising interest rates later this year.
 
After their two-day meeting, their assessment of the economy in their monetary policy statement was upgraded by the members of the Federal Open Market Committee and released earlier this week. Though inflation remains low labor utilization has shown “some increase” and their declared that near-term risks to the outlook have diminished, announced the members in the statement that was released.
 
The recent domestic economic strength leaves the Fed room to defer a hike should inflation fail to materialize, global risks intensify or U.S. indicators slump but acknowledged that it also alerts market participants to increasing policy maker optimism, the statement said.
 
"It’s kind of an upbeat statement, although guarded. This means, ‘We’re keeping an open mind about moving in September. We’re definitely not committed," said Roberto Perli, partner at Cornerstone Macro LLC in Washington and former associate director for monetary affairs at the Fed Board.
 
Till June in the US, fewer workers were part time for economic reasons, although Britain voted to exit the European Union, the subsequent market fallout was orderly and payrolls picked up in June after collapsing in May – all of these indicators of the U.S. economy handed Fed officials good news ahead of their July meeting.
 
Some of the Fed’s wording changes stated facts in light of those developments.  But economists were given the sense that September is a live meeting for a move by some of their characterizations -- like the view that “near-term risks to the economic outlook have diminished” and that job gains were “strong”.
 
“The first paragraph is a clear acknowledgment that things are getting better. They have taken a baby step toward the next hike,” said Priya Misra, head of global interest-rate strategy at TD Securities USA in New York.
 
There have been instances when the Fed have back tracked and upgraded its assessment of the economy at other meetings this year. The Fed for instance backtracked in when faced with global financial-market turmoil and surprisingly weak data at home from their April assessment when it had said “labor market conditions have improved further”.
 
“Given the Fed’s risk aversion, I think the data need to be uniformly strong for them to move in September. What we’ve seen this year is that it’s real easy to knock them off course,” said Dean Maki, chief economist at Point72 Asset Management in Stamford, Connecticut. 
 
When she speaks in Jackson Hole, Wyoming, on Aug. 26, Yellen will have a chance to clarify the Fed’s thinking.
 
“I am not sure if it is enough yet to get excited over September. The next thing we will get excited about would be Janet Yellen’s speech at Jackson Hole. If she wants to make a significant statement, that would be a great place,” said Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago.
 
(Source:www.bloomberg.com) 






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