There are two narratives, according to WSJ's Fed whisperer Jon Hilsenrath, [10] that need to be considered when judging the Fed's next steps. First is, the economy stumbled in Q1 but everything will be awesome going forward (so we should hike rates); and a second newer narrative is the turmoil overseas which could be exaggerated by Fed actions. Hilsenrath hints today that despite the miss in jobs data, it remains above 200,000 and "suggests the U.S. economy finished the first half of the year with a solid foundation to weather turbulence from overseas," giving The Fed room to hike.
As The Wall Street Jorunal reports, [10]
The Federal Reserve is working off of two narratives right now. Thursday’s U.S. jobs report will inform one but not the other.
The first narrative, its baseline, is built around the first half of the year. It goes like this: The economy stumbled in the first quarter, thanks to one-time shocks including bad weather, port shutdowns on the West Coast, statistical mis-measurement, a sharp drop in the price of oil and increases in the value of the dollar. As officials see it, the economy regained its footing in the second quarter, setting the stage for more robust growth in the second half of the year, continued improvement in the labor market, firming of U.S. consumer prices and at least one increase in the central bank’s short-term interest rate.
The second narrative is the spillover narrative from overseas. It is new and Fed officials are still forming their opinions about how it will play out. Greece’s default on loans from the International Monetary Fund and its referendum on accepting tough new terms from creditors create unknowns for Europe and financial markets which could disrupt the Fed’s resumption-of-growth story. A weakened euro could pinch U.S. exports and put further downward pressure on imported U.S. inflation, giving the Fed pause. Global financial strains could undermine confidence among banks and businesses, further depleting investment and growth. Stock volatility and an economic slowdown in China compound the Fed’s global worries. The worries, however, may pass. Greece’s debt default drama might well be resolved with creditors in a manner of days.
The jobs report released by the Labor Department Thursday is widely expected to confirm the resumption-of-growth narrative for the second quarter. Analysts expect the government to report that national payrolls increased in June by more than 200,000 for the 15th time in the past 16 months – the best run of that length and magnitude since the mid-1990s. The jobless rate is expected to be reported down to 5.4% from 5.5%.
If the analysts are right, it will suggest the U.S. economy finished the first half of the year with a solid foundation to weather turbulence from overseas. Fed officials will then need to spend the coming weeks assessing whether spillovers actually materialize and with how much force.
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It seems whether or not rate hikes are comin, The Fed wants uncertainty back in the "markets" - becareful what you wish for (see China).
