A preview of today's Federal Open Market Committee (FOMC) from Commerzbank

Highlights:

  • Fed will no doubt again leave interest rates unchanged at this meeting
  • Is likely to start taking action in September ... the only probable obstacle would be disappointing economic data in the interim. Or external developments - such as a renewed flaring up of the Greek crisis or a slump in China's economy - the seriously darken the economic outlook,
  • The economy is performing more or less as the Fed expects
  • The hurdle to be cleared in order for this step to occur is not very high
  • There have been clear signals lately that a change of course is imminent

Notes Yellen comment from July 15:

  • "We are close to where we want to be and we now think that the economy cannot only tolerate but needs higher rates"

Only disappointing data can now stop the Fed ... the Fed evidently sees itself on the brink of a first rate hike

On GDP:

  • We expect second-quarter US growth to come in at 2.3%
  • which can at best be described as moderate
  • the virtual stagnation during the first quarter caused by one-off factors
  • The chances of growth picking up in the second half of 2015 are good

Labour market

  • Yellen has stressed repeatedly, however, that when assessing the situation on the labour market the Fed considers not just the unemployment rate but other factors as well
  • These paint a slightly less favourable picture, but confirm the strong labour-market recovery which should gather strength over the next few months
  • number of job openings is at its highest since 2001
  • Workers are now also feeling more confident about voluntarily terminating their employment
  • the combination of a very large number of job vacancies and restrained job market turnover indicates that employers are not able to fill the jobs available quickly
  • Part-time work for economic reasons (those wanting to work full time but unable to for lack of corresponding jobs) is admittedly still well above the pre-crisis level. A longer-term comparison shows, though, that the level was also unusually low between 1997 and 2007

Inflation

  • Current price pressure is sufficient
  • The Fed expects, core inflation - measured by the consumer spending deflator excluding energy and food - is to rise to 1.3% to 1.4% by the fourth quarter
  • One pointer to higher inflation is producer prices for final consumer goods products, excluding energy and food, which recently rose at a rate of 3% year on year.
  • This is a far stronger pace than just a few months ago, and sooner or later this should translate into higher consumer prices
  • The employment cost index is one indicator which is clearly pointing upwards ... we regard it as the most reliable indicator because, unlike average hourly wages, it is controlled for changes in the composition of the workforce
  • Wages would appear to be a lagging indicator
  • The large number of vacant jobs suggests that wage growth is likely to start picking up again
  • These initial signs of rising wage growth should be enough to persuade the Fed to raise interest rates

More:

  • A rate hike could come earlier than generally expected
  • There are a number of signs pointing to an early Fed rate hike
  • Relatively prompt action would also be in line with Janet Yellen's preference for 'early and moderate' over late and aggressive'