Three central banks to release monetary policy decisions in the next 48 hours, with the Federal Reserve first in the queue and investors are waiting for 500-600 words statement to provide them with any new signals on Feds plans as no press conference scheduled after the meeting and no updated economic projections to be released. Neither investors nor economists believe a rate hike is going to take place today, with CME FedWatch used to express the market’s views on the possibility of changes in U.S. monetary policy is pricing less than 6% chance for a rate hike.
13 of the Fed policy makers signalled in Sep 16 – 17 FOMC meeting that they expect to raise rates in 2015 and their boss Yellen sharing the same view, but since then data from the U.S. economy were only deteriorating with very little to cheer about. NFP report in Oct 2 showed the country added a disappointing 142,000 Jobs vs 200,000 expected and August figure was revised lower by 37,000 to 136,000. Labor force (the percentage of Americans working or seeking employment) fell to a new 38-year low, while wages remained stagnant at 2.2%. Oil prices dragged inflation lower as prices posted the second straight fall and the steepest in eight months. Existing and pending home sales fell in Sep, meanwhile, manufacturing, durable goods, and exports all not doing well. The recent numbers raised doubts about the strength of the U.S. economy, and a set of positive data is required to prove the weakness is only temporary providing the potential for the Fed to go ahead in tightening monetary policy in Dec 15-16 meeting.
Recent developments within major central banks only added pressure on the Fed, with China easing on Friday and ECB’s Draghi indicating further steps to be taken to loosen monetary policy is only driving the dollar higher. A higher dollar means more pressure on prices, lower exports, less manufacturing, and less revenues for corporate America.
What to watch for in the Statement?
Sep 17 Statement: “housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment.”
Whether the Fed is worried about the past two employment figures should be alerted in the above statement. If the Fed doesn’t continue showing confidence in the jobs market than a Dec hike not likely to happen.
Sep 17 Statement: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”
This statement was added recently reflecting worries about overseas, particularly from China and if they’re still worried the chance for a 2015 hike will become even lower.
Sep 17 Statement: “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
The ongoing inflation debate likely to continue as Fed Gov. Daniel Tarullo rejected the Phillips Curve (Inverse relation between unemployment and inflation) and said in a CNBC interview this has not been working for the last 10 years.
Tarullo’s notes agree with those of Fed’s Board of Governors, Gov. Lael Brainard. Both agree that rate hike should be postponed until next year.
Any tweaks on the inflation subject will be interesting to watch out!