In a Nutshell: “Slowing job growth seems to have spooked the Fed and the members are becoming less certain about multiple rate hikes this year.”
Rate Decision: Fed funds rate range maintained at 0.25% and 0.50%
Until the May employment numbers were released, there was a feeling that we could get an increase in interest rates either at the June or July FOMC meeting. My, how one weak number can change just about everything. Now, the Fed members seem to be trending toward just one rate hike and who knows when that will be. Of course, it only took a few months to go from two or three hikes to one, so don’t be surprised if the amorphous blob that seems to be the monetary authorities transforms into a two rate increase group by September.
The statement released after the meeting didn’t really provide a clear indication of the thinking of the participants about the economy. Actually, it was hard to figure out what the Committee thought. Consider what was written: “The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft.” Some things were better, some were worse and some were, whatever. In other words, obfuscation rather than clarity seemed to be the main purpose of the statement on growth.
Though the statement reflects the yin and the yang of the recent economic data, the economic projections, which are released every other meeting, were decidedly downbeat. Instead of just one member expecting only one rate hike this year, that number has ballooned to six. Estimates of growth for this year and next were downgraded even as 2016 inflation expectations were increased. And maybe most telling, the median funds rate projection was reduced to 1.6% in 2017 from 1.9% and the to 2.4% from 3% for 2018. Those are large changes.
So what has happened since March 16th, the last time the projections were released? The only significant change was a slowing in job gains. Do the Fed members really believe that the initial round of job estimates bear any resemblance to what the ultimate numbers will look like? It is hard for me to believe that is the case. Keep in mind, according to BLS, “the confidence interval for the monthly change in total nonfarm employment from the establishment survey is on the order of plus or minus 115,000”. Really, Fed members are making interest rate projections based on employment numbers that have huge variations around the estimates?
I don’t know what to say. Today, producer prices rose faster than expected as goods costs accelerated and the softening in services disappeared. Yesterday, the inflation story was sharper than expected import price increases. While manufacturing production fell, retail sales were solid in May and that came on top of a robust gain in April, indicating the consumer is spending like crazy. In other words, the economy has hardly fallen on hard times, yet the way the Fed members have reacted, you would think a major slowdown is coming.
So, what will the Fed do this year? I still expect two rate hikes. It is looking more like a September one will be the first, followed by one in December. Even a strong June employment report is not likely to get a rise out of the members, given the pretty dovish projections. They need some time to walk back these numbers and there may not be enough solid data for them to do that before the July 26-27 meeting.
(The next FOMC meeting is July 26-27, 2016.)