Ahead of Fed decision, little consensus on what central bank will do

Thursday is decision day, but it’s still not clear whether the Federal Reserve plans to raise interest rates this month or which of several factors will be the ones that control the outcome.
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Thursday is decision day, but it’s still not clear whether the Federal Reserve plans to raise interest rates this month or which of several factors will be the ones that control the outcome.

MarketWatch said Sunday that analysts don’t believe the Fed’s mind is made up and that closed-door discussions among central bank officials could continue until the last day. The Fed’s two-day September meeting, its sixth of eight scheduled this year, starts Wednesday.

“The [Federal Open Market Committee] is going to have a very serious discussion. Yellen is working to form a consensus, and part of that is what happens at the meeting,” Kim Schoenholtz, economics professor at New York University, told MarketWatch. “I expect a lot of views are sensitive to adjustment as part of this discussion. It doesn’t happen that often.”

Fed officials have been talking about a possible rate increase for months. Last week the central bank put itself into a blackout period and will say no more until it announces its latest decision.

The Fed is generally expected to raise rates sometime before the year ends.

“This is the most telegraphed tightening I’ve seen in 35 years on Wall Street. The Fed has done everything other than send everyone on Wall Street a personal letter,” Robert Barbera, co-director for the Center for Financial Economics at Johns Hopkins University, told MarketWatch.

The Labor Department said earlier this month that the economy added 173,000 jobs in August — a figure that is likely to be revised higher — as the jobless rate fell to 5.1 percent. At that time, Forbes said, Tara Sinclair, chief economist at the job search site Indeed, noted, “With the unemployment rate falling to within the range the Fed has said is consistent with full employment, and labor force participation showing no sign of picking up, it may finally be time for the Fed to call this economic recovery stable and raise rates.”

Last week there were only a few economic reports that could help drive the decision. Consumer credit grew at a seasonally adjusted rate of 6.7 percent in July — a gain of $19.1 billion to a record high of $3.45 trillion, the Fed said — more than analysts expected. The development offered evidence that the economy is on pace for healthy second-half growth.

The Department of Labor said Friday that producer prices were flat in August after an 0.2 percent gain in July, minimizing inflation pressure. Inflation that is weak despite a tighter labor market leaves the Fed in a quandary over rates, CNBC reported.

Consumer sentiment in September fell to its lowest level in a year. The University of Michigan’s preliminary index dropped to 85.7 from an August reading of 91.9, the largest one-month decline since the end of 2012.

Households were less upbeat than a few months earlier about future growth in employment and wages and 73 percent of respondents reported hearing of negative economic developments, Bloomberg reported.

“You’ve seen some fairly alarming news headlines over the last few weeks, and you would expect that to be reflected in consumers’ sentiment,” Paul Ashworth, chief U.S. economist at Capital Economics NA Ltd., told Bloomberg. Still, expectations are “consistent with consumption growth of about 3 percent, which suggests a fairly healthy attitude toward buying.”

Although confidence has dropped, the decrease in the first two weeks of September was not as great as in the immediate aftermath of the plunge in stocks at the end of last month.

“All in all, this is a very positive outlook,” Richard Curtin, director of the Michigan Survey of Consumers, said during a Bloomberg conference call. “Consumers have handled the news of the stock-market declines and its continued volatility quite well and they’re ready to put this behind them and continue on their spending path.”

Perhaps reports that are due this week will help to sway the Fed. The Commerce Department’s August retail sales numbers are due today, and the forecast among economists is for an increase of 0.2 percent. On Wednesday the Consumer Price Index for August will be revealed (the forecast is for a drop of 0.1 percent) and Thursday morning will bring August data on housing starts (they are expected to be slightly lower than the previous month, at 1.17 million) and building permits.

At 2 p.m. Thursday the FOMC will declare its intentions, followed by a press conference featuring Fed chairman Janet Yellen. Then we will know.

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