Economists See Hawkish Hold Next Week as Fed Punts to December

Summers: 'No Compelling Case' for September Rate Hike
  • Bloomberg survey finds 54 percent probability of December hike
  • Majority of economists are confused by Fed communication

The Federal Reserve will keep rates unchanged for the sixth consecutive meeting next week while strengthening guidance about its intentions to raise borrowing costs soon, according to economists surveyed by Bloomberg News.

Fed watchers assigned a 54 percent probability to a rate increase in December, and just a 15 percent chance of a hike when officials meet Sept. 20-21. When asked if the Fed will communicate a stronger intent to raise rates in the near future, 65 percent of economists in the survey said yes. 

Whatever decision U.S. central bankers make between their September meeting and the end of the year is likely to be viewed from the perspective of its impact on the U.S. presidential election. A slow economic recovery has polarized Americans on topics ranging from immigration to trade and interest rates.

“We are going to get a hawkish hold,” said Carl Tannenbaum, chief economist at The Northern Trust Company in Chicago. “The missing piece of the case for raising interest rates is inflation and here the debate is very vigorous.”

Recent readings from the economy have been mixed. Sales at U.S. retailers and factory output dropped more than forecast in August, while job gains continue apace, averaging 232,000 over the past three months.

Meanwhile, low commodity costs and moderate wage gains have held inflation below the Fed’s 2 percent target for more than four years. Minus the effects of food and energy, the Fed’s preferred inflation gauge has averaged 1.5 percent since the expansion began in June 2009, and a continued undershoot could push public expectations about prices lower.

Private economists are also divided over when the personal consumption expenditures price index will show a third consecutive month of 2 percent or higher readings, with 23 percent saying in the fourth quarter of 2017 and 25 percent saying in the fourth quarter of 2018, according to the survey.

Bloomberg News polled 50 economists about their Fed outlook between Sept. 12-14.

Falling Unemployment

The unemployment rate stood at 4.9 percent in August, near the central bank’s 4.8 percent estimate for a rate that corresponds to full employment. Some 51 percent of economists in the survey said it will take an unemployment rate of 4 percent to 4.5 percent to push year-over-year gains in average hourly earnings above 3 percent versus the average of 2.2 percent since 2013.

Tannenbaum said the Fed’s main vehicle for signaling its intent to raise rates this year will be their quarterly forecasts which he predicts will show more than half of the 17 Federal Open Market Committee participants forecasting the short-term policy rate at the end of 2016 higher than the current range of 0.25 percent to 0.5 percent.

U.S. central bankers have struggled to unify around a common message. While their statement says “the actual path of the federal funds rate will depend on the economic outlook as informed by the incoming data,” their views of about what indicators mean for policy strategy diverge.

Sixty-nine percent of Fed watchers surveyed said the central bank’s descriptions of policy strategy have been either extremely unclear or somewhat unclear. Only 23 percent said Fed communication was extremely clear and easy to understand.

“The problem is that data dependence evolves over time and nobody is quite sure what it means,” said Diane Swonk, founder and chief executive officer of DS Economics Inc. in Chicago. “They say it is all about the data, but it is really about data, events and a forecast.”

Swonk said the Fed will leave rates unchanged at this meeting while signaling its intent to hike later in 2016 to keep dissents at a minimum. Kansas City Fed President Esther George dissented at the July meeting, while Boston Fed President Eric Rosengren said on Sept. 9 that a “reasonable case” can be made for raising rates.

“They want to see stronger data to feel confident about their forecast” at a time when forecasting is difficult, Swonk said.

Asset Prices

If the Fed doesn’t change interest rates next week, 82 percent of economists surveyed said further appreciation in asset markets was likely but not certain. That may be determined by events on the other side of the world on the same day of the Fed’s meeting.

The gap between short- and long-term yields is widening globally on bets the Bank of Japan’s next monetary policy action, announced a few hours before the Fed’s own decision on Sept. 21, will steepen the yield curve further.

“It is not going to be a singular reaction to what the Fed does, but a reaction in the context of global monetary policy trends, and with particular attention on the Bank of Japan,” said Karl Haeling, head of strategic debt distribution at Landesbank Baden-Wuerttemberg in New York.

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