The September interest rate announcement has been tipped for several months as one for the markets to watch, in anticipation that interest rates will start to rise.
With a recent bout of global stock market volatility, prompted by perceived economic weakness in China, the prospect of a rate rise in the US could have been pushed further back from September towards later in the year, perhaps even into the New Year.
But the US job’s report last week appears to have further clarified market expectations.
Commenting on the latest economic data, Keith Wade, Chief Economist at Schroders said:
“Non-farm payrolls did not increase as much as expected, rising 173,000 compared to prior expectations of 215,000 but we did see net upward revisions of 40,000 to the last two months’ figures.
“Meanwhile, the unemployment rate dropped to 5.1% whilst average hourly earnings were a tad stronger than expected at 2.2% year-on-year.
“The former is now at official estimates of equilibrium or the NAIRU (non-accelerating inflation rate of unemployment), the rate at which wages begin to accelerate in the economy.
“Although there have been official calls for the Fed to delay increasing interest rates in light of the turmoil in China and parts of the emerging markets, we still believe that the Fed will move on 17 September.
“Events in China do add deflationary pressure into the world economy and have tightened financial conditions via a stronger dollar and weaker equity and credit markets. However, these developments must be seen in the context of a US economy which is enjoying steady, above-trend growth and has used up much of its slack.
“The volatility in financial markets will give the Fed pause for thought, but as in 2013 much of that volatility reflects earlier expectations of Fed tightening.
“Investors had been cutting their exposure to emerging markets well before the latest events in China. It is quite possible that when the Fed does move, the increase in volatility will be limited as positions have already been adjusted.
“Nonetheless, a Fed rate hike on 17 September could add to volatility unless it is accompanied by a clear signal that rates will only move very gradually.
“Policymakers will be keen to avoid an extrapolation of rate hikes in line with past cycles for fear of tightening overall financial conditions too rapidly.
Wade concludes by saying that the underlying message though from the US payroll report is that they no longer need emergency interest rates and can get off first base later this month.
It will be very interesting to see what decisions are made on 17th September and, perhaps more importantly, what commentary accompanies any decision in an attempt to calm nervous markets.