Expected status-quo tomorrow for the Fed

The Federal Reserve has no reason to change its strategy tomorrow
The US central bank will continue to reduce its asset purchases as there are no elements that could push it to change its mind. But I do not expect that there will be an announcement or signal on interest rates. I don’t think that the sentence “low interest rates for an considerable period” will be removed or changed. It’s too early for that.

During previous press conferences, the Fed’s president has clearly demonstrated that she wanted to keep her capacity to decide and that she does not want to have hers hands tied by pre-commitments. I don’t see reason that could imply a change in the statement. Janet Yellen doesn’t want to move too earlier, she prefers moving a little late. It’s no big deal to be a little late but she still sees risks of acting too rapidly. She doesn’t want to replay 1937.
But for sure, economic activity has been strong and robust this summer. The ISM global index (weighted average of the ISM synthetic index) is at its highest since 2005. The August jobs’ number was weaker than expected and this is probably a temporary phenomena. But it also shows that the US economy is probably not yet on a strong trajectory. This is the problem with the US economy; its trajectory is not high enough to follow a self sustained dynamics. It means that it has not a strong traction on the world economy.
Inflation is not currently a threat. Inflation rate based of consumers’ expenditures was at 1.6% in July which is far from the 2% target of the Federal Reserve. Wage increase is too limited to imply a rapid increase in the inflation rate. The average wage for the private sector was up by 1.8% in August. It is not enough to create incentives for companies to change their pricing policy. Increase in productivity compensates for higher wages and so there are no pressures. A increase of 3.5 or 4% could be a trigger for a higher inflation rate. It has not always be sufficient. Current changes are far from these numbers.
The last argument for a status-quo is the fact that the the momentum of the global economy is not so strong. China, Japan, emerging countries do not have currently a strong growth profile and the Euro-zone is not going well. Its growth was close to 0% in the second quarter and surveys are weak as was the ZEW for September this morning in Germany. Low interest rates in the US is a recipe for low interest rates elsewhere and notably in emerging countries. That’s a way to foster a recovery. Change in the US interest rate would dramatically change expectations in all these countries. Can we imagine that it is the good moment for that? Probably not

One thought on “Expected status-quo tomorrow for the Fed

  1. Pingback: The Federal Reserve will maintain its rates low for an considerable period | Philippe Waechter's blog

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