Janet Yellen and the FOMC have spoken (in dovish tones [8]) and now so has WSJ's own Fed whisperer Jon Hilsenrath, whose pre-packaged missive (penned under the now default 20 minute pre-release embargo) rehashes essentially what we discussed [9] earlier today.
In short, the jobs market is telling the Fed one thing ("continued imporovement", although Yellen is apparently looking for a bit more), while inflation (held down by lackluster Chinese demand which has in turn exacerbated a global deflationary supply glut) is saying something different, setting up a "cliffhanger" split decision in September and a tentative 25 bps trial balloon hike at the December meeting because after all, at some point Yellen will have to test the waters to discover if an "exit" is even possible without sending Wall Street into an all out panic.
Here's Hilsenrath's 593-word take via WSJ [10] on the Fed's 539-word statement:
The Federal Reserve on Wednesday kept interest rates near zero but cited progress in the U.S. job market, a sign it remains on course to raise interest rates in September or later this year.
At the same time, however, it flagged a nagging concern about low inflation, which is creating caution among officials and could convince them to delay the day of the first increase.
The Fed concluded its two-day policy meeting with a decision to leave its benchmark federal funds interest rate near zero, setting officials up for a potentially difficult call at the meeting to be held September 16-17.
Fed Chairwoman Janet Yellen has said officials expect to raise rates this year. The central bank has three scheduled policy meetings left to act, September being the next one. Wednesday’s policy statement didn’t send an overt signal about timing, giving the Fed an option for action by September but not a clear commitment to it.
Central to the Fed’s thinking is how it perceives its progress in achieving its “dual mandate” of maximum employment and inflation near 2%.
The Fed has said it will raise rates when it has seen improvement in the job market and becomes “reasonably confident” inflation is on course to return to 2%.
The jobless rate has declined from 10% in 2009 to 5.3% in July, but the Fed’s preferred measures of inflation have remained below 2% for more than three straight years. While progress on the jobs front makes officials inclined to act, while the persistent failure to reach the inflation goal makes them hesitate.
Officials in their policy statement cited “solid job gains” and declining unemployment. The characterization of hiring gains was an upgrade from the Fed’s June policy statement, which noted job gains had picked up. The Fed also slightly tweaked its assessment of slack in the job market, saying underutilization of labor market resources had diminished, striking an earlier qualification that slack had diminished “somewhat.”
The new statement included another small hint that officials see themselves getting closer to the full employment goal. For months they have said they wanted to see “additional improvement in the labor market” before being convinced it is time to rais rates. In Wednesday’s statement they said they wanted to see “some” additional inmprovement, suggesting they see themselves nearing their threhsold on the jobs front for action.
As before, the Fed said the economy has been expanding moderately, and cited gains consumer spending and housing investment.
At the same time, however, they said inflation continued to run below the Fed’s 2% objective and said they were continuing to monitor inflation developments closely, a sign of some trepidation about its low level.
The benchmark federal funds rate has been near zero since December 2008, or 2,417 straight days.
The low rate is meant to spur economic activity by encouraging households and businesses to borrow, spend and invest. A worry for the Fed is that it might also spur another bubble like the one in housing that crippled the economy during the 2007-2009 recession.
International economic developments also weigh on officials as they plot a course for the remainder of the year. Slowing growth in China and other emerging markets is putting downward pressure on the price of commodities and manufactured goods imported into the U.S.
Fed officials have described these developments as transitory. In their June policy statement, they noted that energy prices had stabilized, a sign they believed this source of downward inflation pressure had diminished. In Wednesday’s statement they struck the reference stable energy prices, nodding to a renewed drop in oil prices that materialized in recent weeks.
The Fed voted 10-0 on the action, the fifth straight meeting with a unanimous outcome.
So as we tipped earlier, "nothing today, almost certainly nothing in September, and a small rate hike in December just to show it's possible. The question then is will this send the dollar surging even more, and lead to an even more acute crash in corporate profitability, one which not even buybacks and non-GAAP addbacks can save."
