FOMC Moving Towards A Rate Hike But Timing Uncertain – Danske

Some participants also discussed the risk that a possible divergence in interest rates in the United States and overseas might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports.

Why would a near-term tightening of monetary policy be so problematic? The bombshell in the report came in one sentence: “The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks”. Many members thought that labor market underutilization would be largely eliminated in the near term if economic activity evolved as they expected.

Consumer spending is expected to rise moderately. Most participants still expected that the downward pressure on inflation from the previous declines in energy prices and the effects of past dollar appreciation would prove to be temporary. Translation: some Fed officials are ready for liftoff in September. At issue is that a September expectation is now up for even more debate. “In addition, it was noted that considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation”. Officials appeared more concerned about the threat of a major Chinese economic slowdown. Ahead of the Fed minutes this evening will be CPI data in the US, with a nudge higher from 0.1% to 0.2% on the headline rate, with core inflation seen steady at 1.8%.

The Committee concluded that, although it had seen further progress, the economic conditions warranting an in-crease in the target range for the federal funds rate had not yet been met. Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target range.

Since the July meeting, US economic data has been on the strong side with not only payrolls but service-sector ISM, retail sales and industrial production all suggesting that the economy is in pretty good shape – this is important since “almost all members” indicated that they would like to se more evidence that economic growth was sufficiently strong before voting to raise rates. That sets up a potential dissent in September if the Fed doesn’t act then.