14 July 2015, 20:20
A key reason why we expect the Fed to hike in September rather than wait to
December is developments in the labour market. The June summary of economic
projections showed that the Fed sees the unemployment rate falling to 5.2-5.3%
on average in Q4 this year. Further, the long-run unemployment rate (NAIRU) is
projected to be 5.1%.It is expected that, unemployment rate to undershoot the
FOMC projections and see the unemployment rate reaching the longer term target
rate of 5.1% in September and heading lower from there. The FOMC projections of
the unemployment rate seem to be based on relatively optimistic assumptions
about a rebound in both labour productivity and the participation rate in coming
months, notes Danske Bank.
It is expected that, there will be upturn in labour productivity over the coming year and a cyclical rebound in participation rates but think these adjustments will happen more gradual. Given the assumptions, unemployment should be heading below 5% by early next year, GDP growth will remain around 2.5-3.0% in H2. The unemployment rate is not a perfect measure of labour market slack and, as Yellen highlighted Friday, the FOMC looks at a wide range of measures. This includes hiring rates, quit rates, people working part time for economic reasons and those marginally attached to the labour force. While the latter two of these measures are not yet back at the levels of June 2004, when the most recent Fed tightening cycle commenced, a wide range of other labour market measures is now at better.
An argument used by some within the FOMC has been the lack of a pickup in wage inflation, suggesting that significant labour market slack remains. This is true when looking at the monthly average hourly earnings index, while the quarterly employment cost index suggests a better trend. Importantly, wage indicator suggests that wage inflation should head higher in coming months. Further, sectors with more flexible wage settings have already seen wages picking up along with the decline in the unemployment rate. It is also true that the Fed's preferred measure of inflation, PCE core inflation, remains well below the 2% target rate. However, the low level masks some underlying more positive price dynamics. Over the past three months, core PCE inflation has actually posted above average monthly increases, which suggests that the annual inflation rate is about to bottom. This is also the message from the trimmed mean PCE inflation rate, suggesting that underlying price pressures are somewhat higher than captured by core PCE. Thus, it is believed that a tighter labour market, combined with more convincing signs of higher wage growth, will prompt the Fed to hike rates in September and once more in December. With fundamentals supportive of a continued recovery in the US economy and the labour market next year, it is believed, the tightening cycle to continue in 2016 and look for another 100bp in rate hikes. It is believed that, terminal fed funds rate of around 3.5% to be reached by end of 2018, says Danske Bank.
Source : FX-Primus
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#Forex
#SaleForex
#LabourMarketSlack
#ToDiminishFaster
#FedProjects
#FOMC_Projections
#FOMC_Looks
It is expected that, there will be upturn in labour productivity over the coming year and a cyclical rebound in participation rates but think these adjustments will happen more gradual. Given the assumptions, unemployment should be heading below 5% by early next year, GDP growth will remain around 2.5-3.0% in H2. The unemployment rate is not a perfect measure of labour market slack and, as Yellen highlighted Friday, the FOMC looks at a wide range of measures. This includes hiring rates, quit rates, people working part time for economic reasons and those marginally attached to the labour force. While the latter two of these measures are not yet back at the levels of June 2004, when the most recent Fed tightening cycle commenced, a wide range of other labour market measures is now at better.
An argument used by some within the FOMC has been the lack of a pickup in wage inflation, suggesting that significant labour market slack remains. This is true when looking at the monthly average hourly earnings index, while the quarterly employment cost index suggests a better trend. Importantly, wage indicator suggests that wage inflation should head higher in coming months. Further, sectors with more flexible wage settings have already seen wages picking up along with the decline in the unemployment rate. It is also true that the Fed's preferred measure of inflation, PCE core inflation, remains well below the 2% target rate. However, the low level masks some underlying more positive price dynamics. Over the past three months, core PCE inflation has actually posted above average monthly increases, which suggests that the annual inflation rate is about to bottom. This is also the message from the trimmed mean PCE inflation rate, suggesting that underlying price pressures are somewhat higher than captured by core PCE. Thus, it is believed that a tighter labour market, combined with more convincing signs of higher wage growth, will prompt the Fed to hike rates in September and once more in December. With fundamentals supportive of a continued recovery in the US economy and the labour market next year, it is believed, the tightening cycle to continue in 2016 and look for another 100bp in rate hikes. It is believed that, terminal fed funds rate of around 3.5% to be reached by end of 2018, says Danske Bank.
Source : FX-Primus
#Forex
#SaleForex
#LabourMarketSlack
#ToDiminishFaster
#FedProjects
#FOMC_Projections
#FOMC_Looks
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