“All these markets are a bit on hold waiting for the Federal Reserve policy statement out tomorrow and the GDP number out the next day”, said INTL FCStone analyst Edward Meir.
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The world’s most powerful central bank has not hiked rates in about a decade and markets see virtually no chance it will do so at the end of this week’s two-day policy meeting. Investors are tracking the Fed and economic data for clues on when the central bank will start increasing rates for the first time since 2006.
“The ECB’s signal surprised a lot of people, that as long as we don’t get a major improvement over the next couple of months they will probably expand their QE programme – more money printing, the whole caboodle”.
Both Feroli and Mericle say the Fed is likely to add an upbeat note, acknowledging that broader measures of labor market health – such as the number of part-time workers who prefer full-time jobs – have continued to improve. Measures of consumer spending and factory activity have slumped. A stronger dollar makes American exports less competitive in the global marketplace, and Goldman Sachs estimated that is dragging down USA growth by a full percentage point right now.
In August, just over a month before the Fed’s September meeting, Atlanta Fed President Dennis Lockhart said in an interview that he thought the bar would be very high for the Fed not to move.
To convince markets a rate hike is coming, the statement needs to suggest that only a deterioration in the economy could forestall it.
Still, the Fed could acknowledge progress in other areas of the economy. A harsh winter, though, slowed growth.
While the jobless rate has fallen to a respectable 5.1 percent, there are still significant signs of slack in the jobs market – wages, for one, have not increased as expected.
Since then, the outlook has dimmed further with a hiring slowdown and tepid retail sales and factory output.
The Fed has said it will start raising rates once it’s “reasonably confident” inflation will return to 2 percent within two to three years. She has said that confidence should be boosted by a stronger job market, which will help raise workers’ pay.
Bullion has been weighed down all year by uncertainty over the timing of a rate hike.
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While the U.S. unemployment rate is near normal at just above five per cent, inflation is unusually low and the Fed is alone in contemplating policy tightening while its peers in Europe, Japan and China remain in an easing mode. (Canada also is more energy-industry dependent than the US, getting 20% of its economy from natural resources businesses). That could avert a threatened government shutdown and raise the government’s borrowing limit – two threats that concern Fed policymakers. Unless Yellen manages to shift those expectations well ahead of time, possibly starting with the October 27-28 meeting, a rate hike could roil markets. It also opens the institution to political scrutiny from Republicans who, backed by economists like John Taylor, Stanford University professor and former senior Treasury official, argue the Fed needs to follow more stringent policy rules in its decision-making about where to set interest rates.
