Patient: Fed may drop the word, not the idea

March 18, 2015

RTR4R4RY.jpgFed Chair Janet Yellen may signal later today that she is no longer patient about when to consider raising rates but any eventual hike is likely to come after June, judging by how many key economic reports so far this year have undercut expectations.

An analysis of Reuters polls shows that while employment data – which tends to lag activity – has beaten the consensus and, in some cases, even topped the highest forecast, most other economic reports have come in much weaker than expectations.

Many were even lower than the most pessimistic forecast.

It is almost certain the Federal Open Market Committee will drop the word “patient” from its statement, putting policy in a position where it is completely dependent on incoming data.

But apart from a near-relentless drop in the unemployment rate, the data are not looking particularly bright.


Most data releases such as retail sales, industrial production, manufacturing and gross domestic product have either come below consensus since December or lower than the weakest forecast.

ISM manufacturing – considered to be one of the most reliable leading indicators of activity – has thrown forecasters off the mark by coming in below expectations every month over the same period.

Mark McCormick, FX strategist at BNP Paribas, expects a September hike:

The most interesting part of this cycle is how the U.S. economic fundamentals have diverged from the previous four cycles in 1987, 1994, 2004 and 1999. Indeed, while the current unemployment level coincides with the previous four cycles, most of the other macro fundamentals do not.

U.S. unemployment rate

Even inflation expectations, which would need to rise to warrant higher interest rates, have remained muted.

Yellen told lawmakers last month that the central bank’s policy-setting committee “needs to be reasonably confident that over the medium-term inflation will move up toward its 2-percent objective” before it starts to raise rates.

The latest data showed U.S. consumer prices fell for the first time since 2009 in January on an annual basis.

A plunge in crude oil prices since the summer along with a surging dollar — it is up around 25 percent over the same period — has held down inflation.

The latest Reuters survey forecasts inflation to average 0.3 percent this year, only a tiny fraction of the Fed’s target. And no inflation is forecast at all in Q2, when a thin majority of economists still expect the first hike.

That consensus for a mid-year hike is as close as it’s been in nine months of Reuters polls.

What also supports the view of many saying the Fed will not hike in June is the feeling of deja-vu.

Close watchers of the Fed’s monetary policy will wonder if the debate over the timing of a tightening sounds similar to discussions around its stimulus taper almost two years ago.

Back in May 2013, when then-Chairman Ben Bernanke hinted at tapering the size of the Fed’s bond buying program – worth $85 billion every month – market participants penned down September as the month that would begin.

But a global financial market rout that threatened to throw emerging economies off track led Bernanke to delay by three months.

Six months have now passed since the Fed shut its money printing program.

But in the run-up to what will be the first Fed rate hike in nearly a decade, patience may remain the operative word.

— with additional reporting by Hari Kishan and Vincent Flasseur

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