Later on today sees the latest policy announcement by the US Federal Reserve and it is travelling a road which central banks have found to be very difficult in the credit crunch era. In essence it is looking to exit at least some of the stimulus measures that it has applied to the US economy as a response to the impact of the credit crunch. So far it has stopped its Quantitative Easing purchases but has not fully ended the policy as the stock of debt remains and it continues its policy of rolling it on in time or Operation Twist. Here is it’s own statement on this issue.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
However the meat of today’s Fed meeting is around its view on interest-rates and specifically whether it will continue to tease investors,consumers and workers on the subject of higher official interest-rates. From the minutes of its December meeting.
However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.
This is a familiar tactic from a central bank these days where Forward Guidance has morphed into a policy of hinting at interest-rate increases. However in my own country of the UK these hints have become like the boy or indeed girl who cried wolf. Last summer Bank of England Governor Mark Carney tried it in his Mansion House speech and this week Kristin Forbes of the Bank of England tried it too. This weeks effort rather clashed with the weaker rate of GDP growth that the UK reported only yesterday and Mark Carney’s effort has clashed with what he has done since i.e nothing.
Why might you expect a US interest-rate rise?
In essence the case was made by the US GDP report for the third quarter of 2014.
Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 5.0 percent in the third quarter of 2014, according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.6 percent.
Care is needed as these are annualised numbers but the US economy was expanding at a fair old lick if they are in any way accurate and this leads to potential fears of overheating and possible inflationary pressure.
What is the state of play now?
On Friday we will receive the GDP figures for the whole of 2014 but the up,up and away theme of the previous GDP reports discussed above has hit trouble this week. Let me show why this has happened.
New orders for manufactured durable goods in December decreased $8.1 billion or 3.4 percent to $230.5 billion, the U.S. Census Bureau announced today. This decrease, down four of the last five months,
followed a 2.1 percent November decrease.
The durable good numbers are an erratic series heavily influenced by the aircraft sector and Boeing in particular. But I note that as well as a weak December that November was revised lower and that four of the last five months have shown a fall.
Also the housing market showed signs of a price slowdown. From the Case-Schiller report.
Prospects for a home run in 2015 aren’t good. Strong price gains are limited to California, Florida , the Pacific Northwest,Denver,and Dallas . Most of the rest of the country is lagging the national index gains. Moreover, these price patterns have been in place since last spring. Existing home sales were lower in 2014 than 2013,confirming these trends.
House price increases had risen to an annual rate of over 12% on some measures but have now dipped to below 5%.
What about inflation?
The Federal Reserve made an odd statment last time around as shown below.
The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.
The odd bit is explained clearly in the latest consumer inflation data.
The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index increased 0.8 percent before seasonal adjustment.
As you can see there was a by now familiar fall in consumer inflation in December. Now whilst this is not the number explicitly targeted by the Fed which uses the Personal Consumption Expenditure or PCE deflator we do have a very broad hint. For now inflation is both low and falling. We also now that oil and commodity prices are continuing on a weak path with Dr.Copper for example moving around the US $2.50 level which means that it is some 23% lower than a year ago.
What about wages?
Whilst the latest US labour market report should strong quantity gains in terms of employment and falling unemployment the price issue had a hiccup.
In December, average hourly earnings for all employees on private nonfarm payrolls decreased by 5 cents to $24.57, following an increase of 6 cents in November. Over the year, average hourly earnings have risen by 1.7 percent.
As you can see the US has both nomianl and real wage growth albeit at low levels. Also the wage growth may well now be slowing meaning that any real wage growth will depend on inflation falling further. Not exactly boomtime is it? So far anyway it all looks rather mild and weak.
If the official data is any guide then the US economy has been in a recovery phase for a while now and economic growth acclerated in the summer and autumn of 2014. However we do not yet know the numbers for the last quarter and there have been more than a few hints that when it comes it will show a decceleration in GDP growth. If we add to that the fact that consumer inflation is slowing and wage growth has hiccuped then the case for a interest-rate rise seems to fade away. Perhaps the Eagles were on the case about it.
‘Cause I’m already gone
Yes, I’m already gone
Has the chance gone? Maybe. If we look forwards it may well turn out to be appropriate for 2016 but at a time of high uncertainty can we make that call now? I would like to see US interest-rates go higher but that is different from raising them into a consumer inflation fall and maybe also a wages dip. Plus we need to allow for the fact that the rise in the US Dollar has tightened US monetary policy. Also a rise now could end up like the ECB in 2011 which has followed interest-rate increases with successive cuts into negative interest-rate territory.
Also whilst official interest-rates are the subject of talk about increases I note that market ones as shown by bond yields are falling not rising. The ten-year Treasury note yields 1.79% as opposed to the 2.24% of a month ago.