Fra Commerzbank:
Next week, the Fed will hold its first “hot” meeting, with a rate hike on the agenda. The Fed will let this opportunity pass though, as the economy hit a pothole in the first quarter and the low inflation rate means there is no pressing need for action.
Rather, the Federal Open Market Committee will want to wait and see whether the data are still moving in the right direction. In September though, the US central bank’s patience should be at an end. The slight fall in economic output in the first quarter surprised the Fed and most other observers.
The fact that the economic data have not started to recover as quickly as expected has given the monetary authorities cause for reflection. For New York Fed president Dudley, the growth outlook is therefore more unclear now. On the other hand, there is more confidence now that the inflation rate is gradually moving towards the Fed’s target level, as temporary factors such as the oil price slump and dollar appreciation are having less of an impact, and market-traded inflation expectations have risen.
To sum up, the data situation is not yet clear enough for an interest rate increase as soon as June. Furthermore, a rate hike at next week’s meeting would be quite a surprise for the markets. The Fed will therefore confirm the target range for its key interest rate at 0.00% to 0.25%.
After the meeting the Fed will publish the updated projections of FOMC members. Given the weak start to the year, the growth expectations for 2015 are likely to be scaled down a little, though the monetary authorities should largely confirm their forecasts. Federal Reserve Board chair Yellen will disappoint those hoping for clear signs at the subsequent press conference of when a rate hike is to be expected. She is likely to remain true to her line that the data will determine the timing of the “lift-off”.
Fed targets get closer, rate hike in the autumn The Fed has made it clear that a rate hike will only come onto the agenda when the labour market further improves and it is “reasonably confident” that inflation will rise to 2% in the medium term. The labour market recovery is intact, as is shown not only by the employment data but also by other indices to which Yellen has referred. The number of job openings is at its highest level since 2001 and an increasing number of employees are quitting amid better job prospects (Chart 7).
Against this backdrop, the pressure on companies to offer higher wages will increase. The employment cost index, which statistically is probably the best yardstick for labour cost trends, climbed in the first quarter by 2.7%, year-on-year. After quite a few years of modest wage growth, wage pressure is now evidently rising (Chart 8). This is a key ingredient for higher inflation rates in the medium term.
If this trend continues, there will be nothing in the way of a rate hike at the September meeting
