Fed: Door for action is again open - RBS

Research Team at RBS, suggests that the comments from Fed officials at Jackson Hole have once again put the markets on alert for a rate hike.

Key Quotes

“In her prepared remarks, Chair Yellen said “I believe the case for an increase in the federal funds rate has strengthened in recent months.” In addition, when asked whether the Fed could raise rates at its meeting next month and again before the end of the year, Vice Chair Fischer said Yellen's speech "was consistent with answering yes to both of your questions, but these are not things we know until we see the data."

While a move in September cannot be ruled out, we assign only about one-in-three chance of a rate hike at that time, as we do not believe the data between now and then will compel this risk-adverse Fed to act quickly. According to the minutes from the July FOMC meeting, some participants (including, presumably, Yellen) preferred to delay action until they were confident inflation was moving closer to 2% “on a sustained basis” and until the data gave them greater confidence that economic growth was “strong enough to withstand a possible downward shock to demand.”

We do not believe the data between now and the September meeting will meet that criteria. On the growth side, we look for payrolls in August to have advanced by 175,000, just shy of the recent trend, and both auto sales and the ISM factory index may have pulled back versus July. On the inflation front, the year/year core PCE inflation rate was reported this morning to have held steady in July at 1.6% for a fifth straight month.

In Friday’s employment report, we look for the year/year change in average hourly earnings to have slipped in August from 2.6% to 2.3%. Optically, these results suggest progress towards the Fed’s 2% inflation mandate has stalled. With neither inflation nor growth showing upward momentum, we think the Fed leadership (who are operating under a risk-management approach to policy, i.e. better to move too slowly that too quickly) will prefer to wait for more information before hiking rates further.

Thus, we believe the odds of a move in December are higher than September. That said, a lot can happen between now and year-end, and we have seen before how easily policymakers’ plans to raise rates can get derailed. Thus, at this time, we assign no better than 50-50 odds of a move in December. And, Vice Chair Fisher’s comments notwithstanding, we see very little chance of the Fed raising rates two times before year-end.”