Fed's interest rate decision depends on employment
by Daily Sabah with AA
ISTANBULAug 01, 2015 - 12:00 am GMT+3
by Daily Sabah with AA
Aug 01, 2015 12:00 am
Some American economists hold the opinion that the U.S. Federal Reserve (Fed) will most probably launch an interest rate hike in September if employment data for July and August exceeds an additional 200,000 jobs added.
Mark Zandi, a chief economist at Moody's Analytics, and Jim O'Sullivan, a chief economist at High Frequency Economics, spoke to Anadolu Agency (AA) about the decisions that were made during the Fed's Federal Open Market Committee (FOMC) meeting the previous day and the U.S.'s growth data for the second quarter of the year that was disclosed yesterday.
Zandi said some minor changes on the FOMC's "masterfully prepared" final declaration point to the September meeting, and added: "They slightly changed some sentences in the text and said they wanted to see additional recovery in the labor market. The word ‘some' that was absent in previous declarations increased the possibility of a hike in September."
Zandi also said the downward revision of previous years' growth data and the gross domestic product (GDP), which fell short of market expectations with a 2.3 percent growth in the second quarter of the year, caused disappointment.
"I think growth figures are not one of the decisive factors for the Fed. Developments in the labor market will play a key role in the initiation of an interest rate hike in September or December. The rise of employment by between 200,000 and 250,000 [jobs created] in July and August will be a sufficient reason for the Fed to start the hike in September," Zandi said.
According to Zandi, non-farm payrolls data for August is usually low and employment growth below 200,000 new jobs will create uncertainty about the timing.
Underscoring that all markets, including foreign exchange markets and stock markets, are important for an interest rate hike decision, Zandi said a relatively stable trend in financial markets and the dollar until September will mean a green light for the Fed.
O'Sullivan also said the most striking point in the final declaration is the word "some" that was added to the text, stressing: "With this subtle change, the Fed sent a message that it is about to [surpass its] employment [markers]." According to O'Sullivan, two employment reports to be released on Aug. 7 and Sept. 4 are of vital importance, considering that the Fed will take the first step toward an interest rate hike depending on the labor market.
If reports for July and August indicate that the upward trend in employment and the downward trend in unemployment continue, this will be enough for the Fed. "The rise in employment by more than 200,000 like in the previous months will make it possible," O'Sullivan added. In response to the question of how inflation figures will affect the timing of an interest rate hike, O'Sullivan said the stability or a slight rise in the core Personal Consumption Expenditures (PCE) price index will provide the necessary ground for an interest rate hike.
"FOMC members put it plainly that they did not need a rise in inflation in order to start an interest rate hike, as they believe that the disappearance of a gap in the labor market with falling unemployment will push up inflation pressure. So, after tightening, they will decide on how they will continue to hike interest rates in accordance with inflation figures," O'Sullivan said. He further added that a possible fall in employment figures, rise in applications for unemployment benefits and fluctuations in the dollar will affect the Fed's decision. "The FOMC does not want the dollar experience sharp or rapid falls, and such a development will postpone the interest rate hike to the October or December meetings," he stressed." The next three FOMC meetings, which are held every six weeks, will be held on Sept. 16-17, Oct. 27-28 and Dec. 15-16.
Markets predicted that Federal Reserve Board Chair Janet Yellen holding press conferences following the September and December meetings would make these meetings even more critical. During a recent presentation she made at the U.S. Congress, Yellen said all FOMC meetings are on the table for an interest rate hike decision. "If we decide to hike interest rates during a meeting that will not be followed by a planned press conference, we can inform press members immediately to hold a press conference," she said, highlighting that the October meeting should not be ignored.