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For months, the most powerful and influential central bank in the world, the U.S. Federal Reserve, has been on the cusp of its long-awaited launch of interest rate increases, but the global economy hasn't been co-operating. This week we'll get a pretty good indication of whether the Fed is punting this so-called "liftoff" into next-year country.
Following a two-day meeting, the Fed's policy-setting Federal Open Market Committee (FOMC) will release the latest of its eight-times-a-year rate decision statements Wednesday afternoon. While the Fed has long been leaning toward making a rate increase – what would be its first since 2006 – before the end of the year, many Fed watchers aren't so sure any more, amid signs that global woes are exposing cracks in the U.S. economy.
"The economic data released since the last policy meeting in September has been sufficiently mixed to keep financial markets debating about the timing of the first rate increase," Royal Bank of Canada economists Paul Ferley, Nathan Janzen and Tom Porcelli wrote in a research note.
Futures prices in the bond market imply that traders see only a 6-per-cent chance of liftoff at this week's meeting, a sharp turn from the more than 50-per-cent odds as recently as mid-August. And traders now see only a one-in-three chance that the Fed will cut at the following meeting in December, the last meeting of the year.
"At the last FOMC meeting in September, 13 of 17 officials still expected the first rate hike to come later this year. More recently, however, there has been news of a marked slowdown in employment growth in August and September, and it now appears that third-quarter GDP growth slowed to only 1.5 per cent annualized," Paul Ashworth, chief North American economist at Capital Economics, said in a report. "That weakness in the incoming data has only increased fears that the global economic slowdown and the resulting surge in the dollar are beginning to drag down the U.S. economy."
The first estimate of U.S. third-quarter gross domestic product will be released Thursday, the day after the Fed decision.
A key concern for the Fed, given that one of its two key mandates is maximizing employment (the other is price stability), is the sputtering of a U.S. jobs machine that until recently had been firing on all cylinders. The U.S. labour market added an average of 139,000 jobs in August and September, far below the monthly average of 245,000 in the preceding 12 months. At the very least, the slowdown in employment growth has given the Fed cause to adopt a wait-and-see approach.
"We believe the committee will want to see the next two employment reports [for October and November] before making a decision," Kevin Logan, HSBC's chief U.S. economist, said in a research note. "The policy makers will also want to see whether commodity prices stabilize and if the U.S. dollar gives up some of its recent appreciation against other currencies."
The clues to the Fed's thinking on rate timing will be contained in the carefully chosen words of the brief rate announcement statement, in which even the slightest adjustments from statement to statement are meaningful. In September, the Fed added to the statement new concerns about the global economy and financial markets, saying they could restrain both U.S. growth and inflation. Observers will be looking for any changes on that front.
Another possible indicator of any shift in sentiment on the committee will be how its members vote on the decision. Each of the FOMC's 10 voting members gets an equal vote, and the Fed identifies how each member voted in the decision statement. In September, one member – Jeffrey Lacker, president of the regional Federal Reserve Bank of Richmond – voted against the majority decision to hold the key federal funds rate steady at its record-low range of 0 to 0.25 per cent, arguing that the Fed should have raised the rate by one-quarter of a percentage point.
"He is likely to dissent again," Mr. Logan said. "If he chooses not to dissent, it might mean that the committee is becoming increasingly worried about the negative effect that global economic developments might have on the U.S. economy."
Closer to home, the week will end with Canada's GDP report for August on Friday. After posting declines in each of the first five months of the year, GDP rebounded smartly in June and July, growing a combined 0.8 per cent. Despite some decidedly mixed economic indicators, economists estimate that August will make it three gains in a row, albeit with a minimal 0.1-per-cent advance.
"We already know from monthly reports that sales volumes were down in the manufacturing and wholesale sectors. But inventories were reportedly up, something that leads us to believe output did better than sales in both of those industries," National Bank Financial senior economist Krishen Rangasamy said in a report. "The strong retail report suggests retailing also contributed to growth in August. Oil and gas output could also have increased based on strong energy export volumes, while construction activity was seemingly well supported, particularly in the residential sector based on solid housing starts in the month."
David Parkinson