The Federal Reserve's interest rate liftoff schedule for this year is slowly but surely slip slidin' away, like a space launch aborted by bad weather. It makes you wonder which government agency is directing U.S. monetary policy, the Fed or NASA.
The minutes of the Fed's June 16-17 monetary policy committee meeting released July 8 were a lot more dovish than the announcement that immediately followed the meeting. It now looks like a September rate liftoff isn't as baked in the cake as many previously believed just a few weeks ago.
Since then, of course, a lot has changed, almost all of it conspiring against an early rate increase. September is a lot less likely to happen now, and even December looks doubtful. I didn't think the Fed was courageous or confident enough to make a move this year anyway, so the events of the past few weeks make me more comfortable with that position.
The Fed's June meeting, remember, took place prior to some events that will likely give the central bank pause before raising rates any time soon, including the Labor Department's worse than expected jobs report for June, Greece's default and subsequent referendum to reject financial reforms as preconditions for a new bailout, and the continued plunge in Chinese stocks, which has now started to spread to other markets, including ours.
Nevertheless, the minutes show the Fed was already starting to backtrack a little from the more hawkish public communique that immediately followed the meeting. Back then, you'll remember, the Fed didn't make any overt statements that it would raise rates this year. Instead, a graphic in the release – the infamous Fed "dots" – showed that 15 of the 17 officials expect to start raising rates before the end of this year, with five expecting rates to rise by 25 basis points by December and another five by 50 basis points.
The minutes released this week revealed that on the U.S. economy, "most participants judged that the conditions for policy firming had not yet been achieved; a number of them cautioned against a premature decision." All members but one "indicated that they would need to see more evidence that economic growth was sufficiently strong" before raising rates.
"Many participants emphasized that, in order to determine that the criteria for beginning policy normalization had been met, they would need additional information indicating that economic growth was strengthening, that labor market conditions were continuing to improve, and that inflation was moving back toward the Committee's objective," the Fed minutes added.
The Fed got some of that information in June's jobs report, which hardly argues for raising rates. Nonfarm payrolls rose by a slightly weaker than expected 223,000 jobs last month. In addition, the report included sharp downward revisions in May, to 254,000 from the originally reported 280,000, and April, to 187,000 from 221,000.
The unemployment rate dropped to a grossly understated seven-year low of 5.3%, but that was largely the result of fewer people looking for work because they've simply given up. Indeed, the labor force participation rate fell to 62.6% in June from 62.9, the lowest level since 1977.
On Thursday, weekly unemployment claims jumped by 15,000 to 297,000, the most since February and well above analysts' estimates. The weekly figure has been below 300,000 for the past 18 weeks but has now climbed three straight weeks, four of the past five, and six of the past eight weeks, so this indicator may be starting to lose steam.
Then we got Greece, which not only defaulted on a debt payment to the International Monetary Fund on June 30 but then voted overwhelmingly to reject creditors' demands for some kind of financial reforms as a precondition for yet another bailout.
Greece was nevertheless on the minds of the Fed members at the June meeting even before those events happened. "Many participants expressed concern that a failure of Greece and its official creditors to resolve their differences could result in disruptions in financial markets in the euro area, with possible spillover effects on the United States," the Fed said.
Now the latest trouble spot is China. Since June 12, the bubble in the Shanghai composite index has deflated by nearly 30% despite government and private sector attempts to halt the collapse. That is starting to worry investors in Europe and the U.S., since such a severe drop in Chinese wealth, particularly among "retail" investors, could send the entire Chinese economy into a tailspin, which will have negative effects all around, way worse than Greece leaving the euro zone.
To add to the anti-rate hike pressure on the Fed, the IMF this week reiterated its earlier call for a delay in raising rates until next year, claiming the Fed may have to do an about-face and lower rates back down again in 2016 if the economy doesn't perform as the Fed expects. The IMF has already lowered its growth forecast for the U.S.
As we know well, the Fed always wants "additional information" before it acts, and right now that information is pointing negative, which puts the Fed in its comfort zone not to do anything in the near future.
At least NASA gets its rockets up into the air eventually. The same can't be said of the Fed.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
2 thoughts on “Slip Slidin' Away”
set it up thank you.
The Fed still has plenty of time to raise rates in December, although September seems to be increasingly off the table. The Fed is really cautious, and until it sees a really extended period of no problems it ain't going to raise rates.
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