Fed rate hike likely despite sluggish US data

WASHINGTON • For the second time this year, the US central bank appears poised to raise interest rates despite fresh signs the world's largest economy is not in peak condition.

The recent soft numbers on the economy may have weakened the case for a hike in the benchmark lending rate by the Federal Reserve, which begins a two-day meeting today.

But the Fed is widely expected to stick to its guns, having built up expectations that it will tighten monetary policy at this meeting, although further hikes this year are in doubt.

At last month's policy meeting, the Fed left rates unchanged at between 0.75 and 1 per cent. Policymakers said they would wait to see whether evidence supported another hike.

But they also said first-quarter sluggishness was "likely to be transitory" and a rate hike would likely be appropriate "soon".

This has prompted criticism that the Fed's forecasts are flawed and it is not basing decisions on data, as it pledged to do.

"They seem to be more committed to just getting back to some version of 'normal' than following the numbers," said Mr Jared Bernstein, economic adviser to former vice-president Joe Biden. "It's a little puzzling since chair (Janet) Yellen and others have said they're going to be data-dependent".

Since last month's meeting, the picture has not grown much brighter, especially in the key areas the central bank watches: employment and inflation.

Government data has shown clear signs of flagging job growth and a shrinking workforce, with average job creation in the March-May period down 40 per cent from the previous quarter.

Inflation moved even further from the central bank's 2 per cent target in April, with the Fed's preferred inflation measure at 1.7 per cent for the latest 12 months.

And while first-quarter GDP growth was revised upwards by 0.5 point to 1.2 per cent, it is still no better than sluggish.

Even with the growing doubts, as of last Friday, futures markets were forecasting a better-than- 99-per cent chance of a rate hike at this week's Fed meeting.

But they are now evenly split on the prospects for another rate increase by the end of the year. Previously, analysts were betting on another hike in September.

But some economists say the US economy can tolerate higher rates, as they remain low by historical standards. Mr Mickey Levy of Berenberg Capital Markets pointed to falling long-term interest rates and rising equities prices, with the S&P 500 up 8 per cent since the start of the year.

And Mr Joseph Gagnon, Senior Fellow at the Peterson Institute for International Economics, said the slowing job creation may in fact be a sign of full employment.


A version of this article appeared in the print edition of The Straits Times on June 13, 2017, with the headline 'Fed rate hike likely despite sluggish US data'. Print Edition | Subscribe