Fed’s September rate hike unclear
August 17, 2016, 7:29 pm

A mixed bag of economic data coupled with uncertainty about global markets (Brexit) could delay interest rate hikes this September [Xinhua]

The minutes showed there was little consensus whether to raise rates in September, partially reflecting the uneven data received about the US economy.

In the minutes, released earlier today, the FOMC acknowledged that “total nonfarm payroll employment increased briskly in June, but the increase for the second quarter as a whole was noticeably slower than in the first quarter”.

It noted that the unemployment rate rose to 4.9 per cent in June, partly reversing its decline in the previous month, indicating that for every bit of encouraging data there were statistics that were less so.

The FOMC also said that “labor market conditions generally improved in June and that growth in real gross domestic product (GDP) was moderate in the second quarter”.

However, it acknowledged that inflation is below the two per cent mark determined by the Fed to be ideal to spur growth.

Without factoring in food and energy prices in July, the inflation rate went up only 0.1 per cent for the month. The current inflation rate hovers at around one per cent.

But is the US economy sturdy enough to handle a rate increase next month?

It depends on who you ask.

On Tuesday, Fortune magazine published a wire report quoting New York Federal Reserve President William Dudley as saying that interest rates could be raised in September.

He pointed to gains in both the labor market and wages as critical factors which could prompt policymakers to move in the direction of a rate hike.

But equally influential Federal Reserve Bank of San Francisco President John Williams called for a new approach in how US monetary and fiscal policy is determined and appeared to signal that interest rates would remain level – at least in the interim.

He said that the US economy had settled into a ‘low-productivity and low-growth’ pattern and that central banks needed to look beyond interest rates to find new ways to boost growth.

If one were to bet on Dudley, there is ample evidence of the strengthening and tightening of the labor market – in early August the Labor Department reported that the economy added a whopping 255,000 jobs in July. That number far beat market estimates and suggested that the economy was doing well.

Unemployment stood at 4.9 per cent. But both Dudley and Williams appear concerned about low inflation.

In their minutes, the FOMC acknowledged that there was a difference of opinion about the rate of progress in terms of job gains in the economy.

It said:

A couple of members indicated that, in light of their judgment that labor market conditions were at or close to the Committee’s objectives, some moderation in employment gains was to be expected. In contrast, several other members expressed concern about the likelihood of a further reduction in the pace of job gains, and it was noted that if that slowing turned out to be persistent, the case for increasing the target range for the federal funds rate in the near term would be less compelling.

US markets reacted cautiously following the release of the minutes.

The S&P 500 reversed two days of decline to rise 0.02 per cent to 2,178.59; the Dow Jones Industrial Average was up 0.01 per cent to 18,554.18 while the Nasdaq continued downward by 0.13 per cent to 5,220.40.