Published On: Wed, Sep 14th, 2016

Fed Unlikely to Raise Rates in September

Surprise, surprise, the Federal Reserve is unlikely to raise the Fed funds rate during its September 2016 meeting. Now, this is contrary to Federal Reserve Chairwoman Janet Yellen’s comments during the annual Jackson Hole summit in late August 2016. Once again, Janet Yellen comments shook the markets, but those comments carry less substance after the weaker than expected U.S. jobs report that was released on September 2, 2016.

Jackson Hole Summit Comments

During the Jackson Hole summit, Janet Yellen hinted at a potential interest rate hike in September. Yellen said, “With the U.S. economy now nearing the Federal Reserve’s statutory goals of maximum employment and price stability,” indicating her confidence in the U.S. labor markets. Moreover, Federal Reserve Chairwoman said, “Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.” This comment had hawkish undertones and was indicative of an interest rate hike.

photo donkey hotey

photo donkey hotey

Strengthening Labor Market in June and July

After a weak U.S. Employment Situation report in May 2016, the U.S. jobs market strengthened in June and July. According to the chart below, nonfarm payrolls, as released with no revisions, were just 38,000 for the month of May, while economists were looking for an addition of 158,000. However, after a disappointing May jobs report, nonfarm payrolls surprised economists for two consecutive months.

In June 2016, nonfarm payrolls had an addition of 287,000, month over month, while the consensus estimate was just 180,000. Moreover, the unemployment rate was 4.9%. Thereafter, in July, nonfarm payrolls surprised the consensus estimate with a larger than expected addition. Nonfarm payrolls had a month-over-month change of 255,000, while economists were just looking for an addition of 185,000, month over month.

The strengthening labor market and the low unemployment rate pushed Yellen to make hawkish comments in her speech in late August. Consequently, some traders were at the edge of their seats, awaiting anymore clues that may hint at the timing of the next Fed funds rate hike. Although Yellen hasn’t given a specific time for when the Fed may raise rates, it’s largely believed there will be at least one rate hike before the year end. Moreover, before the release of the dismal August U.S. Employment Situation report, market participants were looking at a potential rate hike during the September 20-21, 2016 FOMC policy meeting.

Fed Raising Rates in September? Not Likely.

Some market participants and economists are still arguing that the Fed could still raise interest rates in its September meeting. Richmond Federal Reserve Bank President Jeffrey Lacker said, “It appears that the funds rate should be significantly higher than it is now,” in his speech to a group of economists, on September 2, 2016. However, Lacker is not a voting member of the rate-setting committee.

According to Morton Finance, it believes that the fed funds rate should be higher than it is now, but a September rate hike is unlikely. Additionally, Morton Finance believes that a December 2016 or January/February 2017 rate hike is more likely, depending on the outcome of the U.S. Presidential election.

Yellen’s comments at the Jackson Hole summit indicated the case for an increase in the fed funds rate strengthened, primarily due to the strengthening labor market. Therefore, the move to raise rates in September was contingent on how the U.S. labor market performed in August. The numbers are out, and the August U.S. jobs report disappointed economists and those pushing for a Fed funds rate hike.

Nonfarm payrolls came in worse than expected at an addition of just 151,000, a large drop off from June and July. The consensus estimate was an addition of 175,000 nonfarm payrolls month over month. The unemployment rate remained stagnant at 4.9%, while it was forecast to fall 0.10%, month over month, to 4.8%. Since both numbers were disappointing, the probability of a September rate hike has dwindled. Yellen spoke too soon and was too bullish on the U.S. economy, yet again. Although the August U.S. jobs report was weaker than expected, the overall economy is still in recovery mode after the global recession.

Guest Author: Lolita Di

photo: photologue_np via Flickr

photo: photologue_np via Flickr

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