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Free AccessREPEAT: Fed State of Play: Headed for Sept Bal Sheet Cuts
--Repeating File Initially Sent at 13:32 ET Friday
--Solid Jobs Report Friday Paves Way for Sept Reinvestment Announcement
--Inflation Data Important Factor for Timing of Next Hike
By Jean Yung
WASHINGTON (MNI) - Strong momentum in job creation and steady economic
growth will keep the Federal Reserve on course to start shrinking its balance
sheet after the September Federal Open Market Committee meeting and raise its
benchmark interest rate once more before the end of the year.
The Labor Department said Friday the economy added 209,000 jobs in July,
above analysts' expectations, and nudged the unemployment rate back to the
16-year low of 4.3%. Average hourly earnings also advanced 0.3% in the month,
keeping the 12-month gain at 2.5%.
Data from earlier in the week showed the year-on-year core personal
consumption expenditure inflation rate held steady at 1.5% in June. While
overall personal income was flat in the month, wages and salaries gained a solid
0.4%, according to the personal income and spending report Tuesday.
The Fed has already signaled that barring any unexpected economic
developments, the FOMC is likely to announce it will start reducing
reinvestments at the September meeting. Policymakers will get one more jobs
report before then, but the bar is low for beginning the long process of balance
sheet normalization.
The next interest rate hike -- which could come several months from now at
the December FOMC meeting -- will depend on continued job growth and some signs
inflation is returning toward target. However, labor market trends could weigh
more heavily on the minds of officials than the recent dip in inflation.
San Francisco Fed Bank President John Williams and other officials
reiterated this week that gradual tightening is the right policy to mitigate
risks that come from running the economy too hot.
The unemployment rate was a 4.9% a year ago. A monthly average pace of new
payrolls of 180,000 in the past 12 months has brought the rate down to 4.3%.
Williams estimates its longer-run rate at roughly 4.75%.
"If job growth continues at this 180,000 number, we're going to see
unemployment just going further and further below and that will create risks,"
said Williams, who will have a vote on rates next year.
"I just think we don't want to let this go too long because eventually
inflation pressures will emerge at some point," he told reporters.
He said he remains confident inflation should hit the 2% objective within
the next year or two and the recent softness has not prompted him to reevaluate
the third rate hike officials in June forecasted for the year.
"I do want to see inflation move up a little bit," he said. But, "I think
underlying inflation trends are positive."
Loretta Mester of the Cleveland Fed, who's also a voter next year on the
FOMC, similarly stressed, "We need to remain focused on the medium-run outlook."
"If economic conditions evolve as anticipated, I believe further removal of
accommodation via gradual increases in the fed funds rate will be needed," she
said.
On inflation, she said she wanted to see more data to judge if there was
"something more" to the recent softness, echoing something several policymakers
have said for the past month.
St. Louis Federal Reserve Bank President James Bullard in an exclusive
interview with MNI this week warned that additional hikes may delay when the Fed
will hit its inflation target.
"Given the inflation outlook, which has deteriorated in 2017, I would not
support further moves in the near term," Bullard told MNI. "It's possible data
will turn around, but we'll have to see. I think for now we should remain on
pause."
Officials are unlikely to raise rates at the September meeting for that
reason, though they will update their economic projections at that time.
By December they should have a better handle on how much of the inflation
weakness is transitory.
With his forecast for no more rate hikes, the St. Louis Fed chief also
acknowledged he is "the most dovish person on the committee right now in terms
of the path for the federal funds rate."
--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com
[TOPICS: M$U$$$]
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.