When Federal Reserve policymakers last gathered in June, the picture that confronted them was a murky one.
Britain was just a few days away from holding an epochal vote on its membership of the EU, while the US labour market recovery appeared to have hit an unexpected roadblock.
Some policymakers had been considering an interest rate increase in the weeks leading up to the meeting but, in the event, the Federal Open Market Committee held fire.
The committee meets again on Wednesday and it is very likely to keep policy on hold when it announces its latest rates decision at 2pm Washington DC time. But the committee may also hold open the possibility of a second rate increase later this year after markets regained poise following the UK’s Brexit vote.
Here are the key points to watch for in Wednesday’s statement.
The FOMC said in June it was closely monitoring inflation and also “global economic and financial developments”, in a sign of caution about overseas hazards. The key risk on its radar was the UK’s referendum. The vote for Brexit triggered an initial bout of turmoil in global markets but since then financial conditions have improved as leading US indices have risen to fresh highs.
Goldman Sachs analysts said in a note on Friday that their financial conditions index had eased compared with the day before the Brexit vote, propelled by stronger stock prices, narrower credit spreads and falling long-term rates. That should help prevent events in Europe from doing too much damage to the US recovery.
Markets have accordingly started to lift the odds of the Fed moving rates this year. According to CME Group, markets are putting a 20 per cent chance of a move in September, and somewhat higher odds on December.
Analysts will be watching to see if the Fed’s post-meeting statement retains its reassurance that it is “closely” monitoring global risks. Changes to the language around risks may contain a signal that it wants the option of pulling the trigger in September to be put on the table.
The jobs recovery
A sharp slowdown in payroll growth weighed heavily on the Fed’s June meeting, along with fears about Brexit. Since then, there has been a bounceback in hiring, with payrolls growing by 287,000 in June, at least 100,000 more than had been forecast by analysts. That followed a downwardly revised gain of 11,000 in May, which now looks like an aberration rather than the start of a weakening trend.
As such, the Fed is likely to revise previous language in its statement stating that the jobs market “has slowed”. There have also been some signs of improved wage growth, even if it remains well below rates seen before the crisis.
A more upbeat assessment, coupled with positive language about other aspects of the economy including spending growth, would be a sign that some of the angst that pervaded the June meeting has subsided.
Growth and inflation
Consumer spending growth has remained resilient and this may be noted in the Fed’s statement. In addition, the New York Fed has published so-called “nowcast” estimates suggesting growth in the third quarter should accelerate to a respectable 2.6 per cent annualised pace from 2.2 per cent in the second quarter.
With inflation expectations still relatively subdued, a number of Fed policymakers have suggested they want to see clearer signs that inflation is heading towards target before lifting rates again. Core inflation measured by the personal consumption expenditures price index is at 1.6 per cent, which remains some way below the Fed’s 2 per cent goal.
What’s more, the Fed has received relatively little hard data to allow it to assess what impact, if any, the Brexit turbulence has had on the US economy.
Plenty more economic indicators will come out before it meets in September, including two more employment reports and second-quarter gross domestic product numbers. As things stand, the risk-averse central bank will be reluctant to send too bullish a signal on the US economy as it keeps its options open on rates.
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