US GDP Gives Fed Inflation Glimmer it Needs

Last month, the U.S. unemployment rate fell by 0.2% to 5.3%. The Fed has kept the overnight federal funds rate, and in turn other rates, near zero since December 2008.

He added: ‘The Fed is doing a good job getting people ready for a rate hike before year’s end, making it likely to be a low-impact event.’.

Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months.

Meanwhile, Federal Reserve Chair Janet Yellen went on record earlier this month saying, “Indeed, most participants in June projected that an increase in the federal funds target range would likely become appropriate before year-end”. While it’s a foregone conclusion that the Fed won’t be raising rates tomorrow – neither pundits, nor economists, nor markets (via fed funds futures contract implied probabilities) are pricing in a rate hike by any means – it seems that everyone will be watching the FOMC tomorrow as a guide for the September policy meeting.

Just this morning, for example, Jan Hatius, chief economist of Goldman Sachs (GS) reiterated that popular opinion.

Capital Economics said in report on the annoucement that the policy statement was largely unchanged, with only some minor tweaks to acknowledge the improvement in the economic data.

June’s unemployment rate of 5.3% continued a steady drop to pre-recession levels, but inflation continues to run below the Fed’s 2% target.

This Fed meeting was really about September-is that the right time to start hiking rates?

What was thought to be a quarter of contraction in Q1 was revised higher yesterday, moving from -0.2% to 0.6% signalling that the transitory effects of poor weather and labour disputes at some large ports were not as bad as had been previously expected.

On the other hand, if the Fed is ahead of the market and backs off its optimism about at least one rate hike in 2015 (taking a more dovish tone with respect to developments in Chinese financial markets, Greek debt negotiations, and global energy markets), the market is more or less already expecting that outcome already, and therefore the downside for the US Dollar may prove to be limited over the coming days. At this point in time, it’s been priced in that the Fed won’t be raising rates later today.

The FOMC policy action was unanimous among voting members. With the U.S. economy and job market now steadily rising, the need for ultra-low rates to stimulate growth is fading.

U.S. stocks drifted in choppy trade Thursday, as traders digested Q2 GDP data in the wake of Wednesday’s FOMC announcement.

Earnings continued to dominate the headlines, especially in the social media space. Spanish GDP, meanwhile, rose by 1% in the second quarter as the nation experienced its strongest growth period in eight years. Revenue came in at $712 million last quarter – well-above analysts’ $680 million forecast.