Thursday, July 07, 2016

Fed’s Urgency to Hike Fades Away as Jobs and Brexit Dim Outlook
Craig Torres
July 6, 2016 — 4:49 PM EDT

The Federal Reserve is losing confidence in its need to tighten any time soon as officials face rising uncertainty about the outlook for growth at home and abroad.

The Fed Lifts Off

U.S. central bankers want proof that job creation has resumed a healthy pace, that the underlying momentum of the economy was intact, and that inflation will eventually hit their 2 percent target.

That’s according to minutes released Wednesday of their meeting last month, held the week before Britain’s June 23 vote to leave the European Union which has further clouded the outlook.

Even if these fundamentals start to emerge in the U.S. -- perhaps as soon as Friday with the June jobs report -- U.S. central bankers have additional concerns about the global financial impact of the U.K. referendum, China’s stability, and just how much room they have to boost rates before the higher borrowing costs start to slow growth.

The economic fog is thick outside Chair Janet Yellen’s window, and in those conditions central bankers walk instead of run. The question is whether greater clarity arrives in weeks, or months, if at all this year.

“It is possible this is a first step in a slow march toward not hiking this year,” said Michael Hanson, senior global economist at Bank of America in New York. His firm has a December increase penciled in. “But it feels like a close call, and before December seems unlikely.”

No Chance

Fresh turmoil in financial markets following the Brexit vote and renewed questions about global growth have investors pricing in no chance of an interest-rate increase at the Fed’s July 26-27 meeting and only a 12 percent probability of a move by year-end, according to prices in interest rate futures contracts.

“It will probably take some time for the Fed to get a full accounting on the outlook for growth, which will mean that any move on rates will be another three to four months away at least,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities (USA) LLC in New York.

The minutes also showed divisions on the committee about underlying trends in the economy.

Many Fed officials thought the paltry 38,000 jobs gained in May probably understated the true underlying pace of hiring because of transitory factors including a telecommunications strike and statistical noise. At the same time, some noted that the lower rate of increases in payrolls could “be indicative of a broader slowdown in growth of economic activity.”

‘Less Confident’

Similarly on inflation, “most” officials expected to see “continued progress” toward the inflation target, citing tightening resource utilization and a more stable dollar. Others were “less confident,” the minutes said, due to “persistent disinflationary pressures,” ranging from weak growth abroad to low inflation expectations.

“What really showed up in the minutes was the deep disagreement between the hawkish and dovish wings of the committee about the risks,” said Dean Maki, chief economist at Point72 Asset Management LP in Stamford, Connecticut.

Global financial conditions had improved since early in the year, according to the minutes, but in addition to Brexit some meeting participants said uncertainty around China’s foreign-exchange rate policy, and high debt levels in China and other emerging markets, “represented appreciable risks to global financial stability and economic performance.”

“The committee is only talking about downside risks,” said Bricklin Dwyer, an economist at BNP Paribas in New York, who himself expects no increases this year or next. “It’s that they maybe -- hopefully -- will get their forecast, but certainly no one is talking about revising up growth, or inflation, or anything.”

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