2 reasons why the Fed might not raise interest rates in September

2 reasons why the Fed might not raise interest rates in September

A few months ago FED Chair, Janet Yellen, shifted the goal posts for the start of the interest rate hiking cycle slightly when she introduced NAIRU as the important indicator. NAIRU stands for Non-Accelerating Inflation Rate of Unemployment, quite a mouthful. It becomes easier to understand if you pause after “inflation”. It is the rate of unemployment that is compatable with non-accelerating inflation.

Most analysts expected the FED to raise rates when unemployment gets to 6.5%, then to 6% and so on. Unemployment in the US is getting close to 5% and still the FED is quiet. Unemployment at 5% is commonly assumed to be full employment, that time when scarcity of workers start to push inflation higher. NAIRU cannot be forecast, instead we have to look at the Employment Cost Index (ECI) to tell us if there is inflation coming from a shortage of workers.

Although the ECI has been rising steadily in 2014, it dropped to 0.2% QOQ from 0.7% in the Q1, much less than the expected 0.6%. The YOY figure also dropped back to 2%. This was a surprising drop and all eyes will be on the Q3 figure due to be released only by end September.

ECI CPI

This gives the FED some breathing room, especially in light of the low CPI numbers. The second reason is that the FED actually looks more at the Personal Consumption Expenditure Price Index (PCE PI) than at the CPI figures. This Index is also coming down, only 0.2% announced last week. Low energy prices are responsible for that, but even excluding food and energy, the Index is comfortably below 2%, the FED target.

FED PCE Inflation

Unless these two statistics swing around substantially it is my view that the FED will postpone the interest rate hiking cycle, maybe even to 2016. Good news for stockmarkets.

– Gerhard Lampen.

Head – Sanlam iTrade Online

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