Do Conditions Support a Rate Increase From the Fed?

Economic Pulse
October 28, 2015

When the Federal Reserve last met in mid-September, they held monetary policy rates constant, citing “recent global economic and financial developments [that] may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” They also noted that the Committee was monitoring “developments abroad.”

Has there been “further improvement in the labor market” and should the Fed be “reasonably confident that inflation will move back to its 2 percent objective over the medium term?”

Not yet, in my opinion.

Since mid-September, while equity markets have stabilized (the S&P is up 3.8%, and China’s CSI 300 has rebounded by 11%), U.S. economic data continues to show modest, if any, improvement.

What new economic data do the Fed have to analyze?

Labor Markets

September’s payroll report showed a gain of just 142k jobs, and a significant negative revision to the prior two months’ data of -59k. (Heading into the report, the 6-month average monthly gain was 205k.)

While the unemployment rate did hold steady at 5.1%, data on wages were weak; the month-on-month percentage change in average hourly earnings was unchanged, while the change in average weekly earnings was -0.3%--the largest decline since 2013.

The Fed’s Labor Market Conditions Index, a composite of 19 labor market indicators released by the Fed on a monthly basis, was unchanged, marking the weakest reading since April, as September’s labor force participation rate and measure of weekly hours worked each negatively weighed on the index.

Inflation

The dollar has continued its surge, rising 3.5% against the euro, 1.9% against the British pound, 0.3% against the yen, even as it has fallen -0.2% against the Chinese yuan since the Fed last met. Not surprisingly, even excluding petroleum, the U.S. inflation-adjusted trade balance in goods fell to a 6-month low; total exports fell to the lowest level since June 2011. Yesterday’s data on September durable goods showed that new orders for non-defense capital goods excluding aircraft (which proxies demand both domestically and abroad) fell -0.3% MoM in September, while August’s figure was revised from -0.2% to -1.6%.

The dollar’s strength is denting any upturn in inflation; September PPI for final demand fell -1.1% percent for the 12 months ended in September-- the eighth straight 12-month decline. Even away from food and energy, the index was unchanged, the third consecutive month without an increase. The index for consumer prices showed a modest upturn excluding the drag of food and energy; even so, the core index hasn’t reached 2% on an annual basis since early 2013. There have been a handful of companies that have announced wage increases (independent of legally-required increases) such as Wal-Mart and GM, but it’s hard to see a major increase in inflation stemming from any higher spending. Retail sales will be one measure to watch, especially heading into the holiday season.

There are plenty of data points one can highlight to suggest the economy is humming; the most recent S&P Case-Shiller data showed the annual percentage change in its 20-city composite at a 12-month high; total auto sales are also at decade highs. Nonetheless, if the Fed bases its decision on the performance of prices and employment, there’s no reason to hike rates today.