The pack has been shuffled for the Federal Reserve officials and the time for them to show their interest rates hand is drawing closer with the next meeting of the Federal Open Market Committee (FOMC) scheduled for 16 - 17 September.
Much has changed since the last Fed meeting in July, with the havoc on global markets unleashed by the Chinese central bank decision to devalue the yuan on August 11 changing the game. Investors and analysts alike believed that the next FOMC meeting would result in a hike in the interest rate, but now they are less certain.
With the exception of inflation, which continues to remain stubbornly low as it has done for the for the past 40 months by staying below the 2% level the Fed sees as the target number, all the other indicators are positive.
The U.S. definitely seems to be well into a recovery phase after the Great Recession with the number of jobs on offer growing, while there also seems to be a steady increase in the wages on offer which indicates a tightening labor market. The Fed officials aren't going to be able to learn much more about the state of the economy between now and 16 September and the decisions on which way to vote, have probably been made.
Andrew Chamberlain, chief economist with the job site Glassdoor, told MarketWatch, “Anyone who wanted to raise rates before will vote to do so. Anyone who didn't will stick to their guns.”
The only thing that can really change in the interim is the state of the global stock markets and even then, stock volatility provides very little evidence as to the actual health of an economy. Central bankers will obviously be watching to see whether there are signs that the market turmoil is settling as they wouldn't want to roil the markets further.
The press release on July 19, after the last Fed meeting, provides one very good clue to the way the officials are thinking. The report consists of five paragraphs and the word inflation related to any rates decision is mentioned 12 times, while the 2% inflation target gets mentioned four times, indicating the importance of indications that inflation is moving closer to the desired 2% level.
Meanwhile, the devalued yuan, the stronger U.S. dollar and the restraining effect this might have on U.S. inflation at a time when Fed officials would like to see inflation climbing higher, could be the only factors to dampen their enthusiasm for a rates hike in September.
The last word from Richmond Fed President Jeffrey Lacker, a strong proponent of a rates hike, said, “It’s time to align our monetary policy with the significant economic progress that we have made” after reviewing the August jobs report.