The Fed seems willing, but the economy may be too weak

So Federal Reserve chairman Janet Yellen believes the argument for a rate increase has strengthened. That’s not the same as saying one is imminent.

So Federal Reserve chairman Janet Yellen believes the argument for a rate increase has strengthened. That’s not the same as saying one is imminent.

“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,” Yellen said in a speech at the Kansas City Fed's Jackson Hole Economic Symposium on Friday.

The financial markets moved downward, then minimized their losses as they digested what she and Fed vice chairman Stanley Fischer, who later sat for an interview with CNBC, had to say. The markets’ moves that day showed they don’t expect a rate hike as soon as the Fed’s September meeting.

Fischer notably said two increases are still possible before the year ends, but Yellen was more noncommittal in what CNBC described as the Fed’s game of good cop, bad cop.

"[Yellen has] just kept the door open for a hike sooner rather than later," Subadra Rajappa, an interest rate strategist at Societe Generale in Washington, told Reuters.

Indeed, Yellen did not say what the central bank needs to see before taking action. That was left to Fischer. Speaking with CNBC, he said the August jobs report, which is due Friday, will get close scrutiny,” along with other data that may come in.”

That, of course, is the rub. Government and private reports flow into the business mainstream every week, some with information more recent than others, depending on the speed with which the data become available to the agencies responsible for analyzing them.

"The problem with this economy is there is so many numbers each day," Fischer said. "You have to try and figure out what is the main thrust of what's going on in the economy. You can always find a set of data that will enable you to build a different case. That's the hard part."

Last week’s reports were a good example.

The Commerce Department said new-home sales in July were the highest they have been in nearly eight years. They rose 12.4 percent, to a seasonally adjusted annual rate of 654,000, 31 percent higher than in the same month a year earlier.

On the other side of the market, home resales fell 3.2 percent in July, to a seasonally adjusted annual rate of 5.39 million. The monthly report from the National Association of Realtors said that was 1.6 percent lower than in the same month last year.

Taken together, the information “tells an important tale of two housing markets,” Trulia chief economist Ralph McLaughlin wrote in a midweek note that was cited in a MarketWatch report. “Homebuilders continue to thrive on healthy demand while homebuyers remain stifled by anemic inventory.”

Inventory of existing stock is the lowest on record, taking population changes into account, McLaughlin added.

Separately, orders for durable goods — long-lasting products such as major appliances — rose 4.4 percent in July, the most sizable gain in this category since last fall.

The Commerce Department said shipments of manufactured durable goods rose $400 million, to $232.9 billion. Computers and other electronic products drove that increase, rising by $400 million, or 1.5 percent, to $27.1 billion.

Looking back to the second quarter, though, the department said the nation’s gross domestic product rose just 1.1 percent from April through June. Corporate profits fell for the fifth time in the past six quarters and business investment and government spending were weak.

Lastly, consumer confidence, as measured by the University of Michigan’s Consumer Sentiment Index, slipped slightly in its final August reading, to 89.8, from its late-July reading of 90.

“Less favorable personal financial prospects were largely offset by a slight improvement in the outlook for the overall economy,” Richard Curtin, chief economist for the university’s Surveys of Consumers, said in a statement.

“Most of the weakness in personal finances was among younger households, who cited higher expenses than anticipated, as well as slightly smaller expected income gains. Importantly, long-term inflation expectations fell to the lowest level ever recorded, with near-term inflation expectations anchored to that same low level. Just as low inflation has provided strong support for real income gains, low interest rates have increasingly become the sole driver of large discretionary expenditures.”

On Monday, the Commerce Department said consumer spending rose 0.3 percent in July as people bought more trucks and cars, and personal income rose 0.4 percent. The department also said inflation as measured by the Personal Consumption Expenditures Price Index — the Fed’s preferred price benchmark — was unchanged in July. Excluding the volatile food and energy categories, the index rose 0.1 percent.

MarketWatch said the PCE index rose 0.8 percent during the 12 months that ended in July, a tick lower than in June. The annual rate of core inflation was flat at 1.6 percent. The data show that prices are not rising in a way that pressures the economy.

Today, we will see the Conference Board’s Consumer Confidence Index for August. The consensus estimate of economists is that this barometer fell slightly, to 96.9, from 97.3 a month earlier.

Reports Thursday on second-quarter productivity, July construction spending and August motor-vehicle sales will precede Friday’s jobs report. Economists estimate that American companies added 189,000 jobs in August, down from 255,000 a month earlier.

Slower job growth could again delay the Fed’s march toward its first rate increase since December. As Fischer noted, it’s just one of the reports, though perhaps the biggest one, that the Fed will need to digest before it meets again in September.

“If we get a really strong employment report, 200,000 plus, with a much higher wage growth, then [the Fed] would find it very difficult to resist a [rate] hike, probably in September, but definitely by December,” Mohamed El-Erian, Allianz SE’s chief economic adviser, said Friday in an interview on Bloomberg Television. “But that depends on getting such an employment report.”


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