U.S. Economy 'Approaching' Interest Rate Liftoff
Federal Open Market Committee members last month thought the economy was almost stable enough for the long-awaited hike.
All eyes will be on the Federal Open Market Committee, led by Federal Reserve Chair Janet Yellen, in September as the group weighs the timing of the country's first interest rate boost since 2006.
By Andrew Soergel Aug. 19, 2015 | 4:22 p.m. EDT + More
U.S. economic conditions are getting close to warranting America's first interest rate hike since 2006. Or at least that's what officials at the Federal Reserve thought in July.
The Federal Open Market Committee on Wednesday publicly released a detailed summary of its July meeting, at which members discussed the timing and intensity of a pending interest rate increase that many expect will come in September.
"Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point," the minutes said. "One member, however, indicated a readiness to take that step at this meeting but was willing to wait for additional data to confirm a judgment to raise the target range."
The FOMC's minutes, usually released a few weeks after each of the committee's eight annual meetings, add a hint of clarity to the Fed's largely closed-door operations. The committee has stressed data-dependence in its approach to an interest rate liftoff, but monthly economic indicators are notoriously difficult to interpret.
Sluggish Consumer Price Index Ticks Up as Economy Waits on Inflation
The Fed is responsible for maximizing employment and fending off inflation as part of its dual mandate from Congress. But domestic payrolls, unemployment, and pricing indexes can move up or down for any number of reasons in any given month, so the minutes play a crucial role in deciphering the Fed's take on economic progress.
"In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in June indicated that economic activity had been expanding moderately in recent months," the minutes said. "A range of labor market indicators, on balance, suggested that underutilization of labor resources had diminished since early this year."
The minutes' downside, however, lies in their timing. It's important to keep in mind that whatever the Fed was looking at in July is largely outdated nearly a month later. A lot can happen in the U.S. and global economies in a month.
"Since the end of July, oil prices have fallen further. Commodity prices have also fallen, and that's important because that impacts inflation," says Don Ellenberger, a senior vice president and senior portfolio manager with Federated Investors. "The Fed tells us they're data-dependent, and the data has changed since then."
China's currency devaluation is arguably the biggest international economic news that's cropped up since the end of July and could potentially delay an interest rate liftoff in the U.S. The move has made Chinese exports more affordable with respect to foreign exchange rates, while imports into China have become comparatively more expensive for domestic consumers. Beijing's sudden currency moves likely weren't on any Fed official's radar a month ago.
Still, multiple FOMC meeting attendees last month did note that "a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook."
"The Fed interprets international events through the prism of how they will impact their dual mandate: the U.S. employment situation and U.S. inflation," Ellenberger says. "To the extent that what happens in China is going to have a material impact on either our employment or on inflation is something that the Fed has to pay attention to."
The Fed is responsible for assessing the health of the U.S. economy, and an interest rate move will largely reflect America's own economic conditions. But considering Chinese volatility could ultimately bleed into American trade output, it's safe to say the Fed will be warily eyeing China as it weighs the timing of the pending hike.
"Will concerns over China be enough to delay the Fed? Alone, no," Lindsey Piegza, chief economist at Stifel Fixed Income, wrote in a research note Monday. "However, coupled with a slower-than-expected recovery in the domestic economy, additional headwinds from 'international developments' are likely to deter the Fed from initiating liftoff during increasingly uncertain global conditions."
Domestically, however, it's largely been business as usual over the last month or so. On the employment front, the only national jobs report issued since the FOMC's last meeting showed that the U.S. generated a respectable 215,000 positions in July – the lowest monthly reading since April but still north of the 200,000-additions benchmark.
"There hasn't been much of a change on the payroll front," Ellenberger says. "That was pretty much in line with the other numbers that we've been getting in recent months."
And inflationary pressures have remained largely absent from America's economic landscape. Consumer prices – which are considered a primary inflationary indicator and a marker for what Americans pay for an assorted basket of goods and services – barely budged in July. Prices ticked up only 0.1 percent month over month and 0.2 percent from July 2014 – meaning the Fed's long-awaited and more substantial gains, which would fundamentally justify a rate hike, haven't yet materialized.
"Since the end of 2012, every Fed communication has continued to acknowledge the substandard level of inflation which continues to persist," Piegza wrote in a research note Wednesday, saying there is "no justification for policy tightening."
Last week's Producer Price Index – another inflationary indicator measuring the prices paid by domestic producers to generate goods and services in the U.S. – also showed a 0.2 percent monthly gain in July that was still 0.8 percent down from where it was a year prior.
"The [Federal Open Market Committee] would like to see stronger inflation," Stuart Hoffman, senior vice president and chief economist at The PNC Financial Services Group, wrote in a research note Wednesday. "But in [a statement released at the end of July], the FOMC said that it does not need to actually see inflation at 2 percent before raising the Fed funds rate – just that the committee 'is reasonably confident that inflation will move back to its 2 percent objective over the medium-term.'"
The Fed, then, may end up acting in absence of adequate inflation and a stable global economic backdrop. In fact, with U.S. employment indicators staying consistent in recent months, officials could do more harm than good by keeping interest rates at their current near-zero levels indefinitely.
"It really is hard. It's a tossup on whether they'll go in September or not," Ellenberger says. "If the economy sinks into recession, [Federal Reserve Chair Janet Yellen is] not going to be able to lower rates to stimulate growth if they're already at zero. And the longer the Fed waits to hike, the greater the chance that something somewhere blows up because of her cheap money policy and the Fed gets blamed for it." |
