Federal Reserve Running Out of Room to Hike Before End of Year

The market has been progressively discounting the probability of a September rate hike as early as the June FOMC announcement of no change to the interest rates. The next likely candidate became September, more because its is a meeting followed by a press conference unlike October’s FOMC than any other factor.

A strong non farm payrolls (NFP) number on September 4 raised some optimism about the Federal Reserve firing the much awaited first rate hike. The Chinese stock market sell off put big question marks on the state of the global economy. The Fed is the caretaker of the U.S. economy, but if it impacts the rest of the world negatively it will come back to haunt U.S. growth. The International Monetary Fund (IMF) and similar organizations have asked the Fed to hold off raising rates this year.

Fed policy members have been divided in their comments, which has added confusion to what the market expects from the central bank. It is a fact that the post crisis recovery has arrived, but it is an uneven recovery. The number of American jobs has increased, but it is the quality of those jobs that is in question. Wages have not risen and the lack of consumer spending shows the jobs don’t leave Americans with enough disposable income. Retail sales are recovering at a slower pace with various setbacks but alone do not justify higher interest rates.

Consumer sentiment fell on Friday to 85.7 when a 91.4 reading was expected given the strong survey results last month (92.9). This is the lowest level in 2015 and even if the Fed members were still unsure on their vote, this will probably put the rate on hold until conditions improve. If the Fed keeps the U.S. interest rate unchanged at below 0.25 the USD is due for hard sell off as interest rate divergence expectations will not come to pass.

September’s FOMC remains the best chance for the Fed to start a tightening cycle without triggering too much volatility in the market. Volatility is inevitable, even as this much-awaited event comes to pass. A horrible first quarter destroyed the June FOMC chances of being the chosen one to start raising rates. In hindsight given how those GDP numbers were revised and the economy bounced back, it would have made more sense to do it back then. The Fed will probably be thinking that too, and trying to avoid it if possible, which is why September remains on the table and will do so, until the rate announcement either validates or scratches it out of contention.

USD events to watch this week:

Tuesday, September 15
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
Wednesday, September 16
8:30am USD CPI m/m
Thursday, September 17
8:30am USD Building Permits
8:30am USD Unemployment Claims
10:00am USD Philly Fed Manufacturing Index
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pm Federal Funds Rate
2:30pm USD FOMC Press Conference

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