19 Jun 2015
Fed rate hike: Focus remains on economic activity and labour market – Nomura
FXStreet (Barcelona) - Research Analysts at Nomura explain that the core CPI and PCE deflator are unlikely to see any renewed downward pressure and are on the verge of stabilizing, which means that when it comes to the rate outlook, the Fed remains more concerned about economic activity and job gains.
Key Quotes
“In relation to monetary policy, the FOMC has set economic conditions that should be met before liftoff – i.e., improving labor market conditions and no further declines in core inflation. Despite some weakness in core CPI in May, we judge that core inflation appears to be stabilizing. While the gap in inflation between core CPI and core PCE deflator widened recently, core PCE is also expected to stabilize in the near term even if the divergence between both measures of inflation does not shrink any time soon.”
“In addition, it’s increasingly unlikely that we will see renewed downward pressures on consumer prices from external factors as the US dollar index has levelled off and energy prices have stabilized recently, although it takes some time for the impact from the stronger dollar to diminish.”
“Therefore, in terms of an initial rate hike, the main focus remains on economic activity and the sustainability of solid job gains, which many Fed officials are concerned about as opposed to inflation.”
“Impact on GDP tracking: The CPI came in weaker than expected, which lowered our estimate for the PCE deflator. That means more personal consumption on an inflation-adjusted basis. As a result, our Q2 GDP tracking estimate edged higher by one-tenth of a percent to 2.7% from 2.6% previously.”
Key Quotes
“In relation to monetary policy, the FOMC has set economic conditions that should be met before liftoff – i.e., improving labor market conditions and no further declines in core inflation. Despite some weakness in core CPI in May, we judge that core inflation appears to be stabilizing. While the gap in inflation between core CPI and core PCE deflator widened recently, core PCE is also expected to stabilize in the near term even if the divergence between both measures of inflation does not shrink any time soon.”
“In addition, it’s increasingly unlikely that we will see renewed downward pressures on consumer prices from external factors as the US dollar index has levelled off and energy prices have stabilized recently, although it takes some time for the impact from the stronger dollar to diminish.”
“Therefore, in terms of an initial rate hike, the main focus remains on economic activity and the sustainability of solid job gains, which many Fed officials are concerned about as opposed to inflation.”
“Impact on GDP tracking: The CPI came in weaker than expected, which lowered our estimate for the PCE deflator. That means more personal consumption on an inflation-adjusted basis. As a result, our Q2 GDP tracking estimate edged higher by one-tenth of a percent to 2.7% from 2.6% previously.”