Fed’s Two Jobs Collide as Drop in Unemployment Vies With Inflation – Bloomberg 11-18-14

Salient to Investors:

  • The median economist expects the jobless rate by June 2015 to be very near the 5.2%-5.5% range considered full employment, while the Fed’s preferred inflation gauge will not have budged from its current 1.4%.
  • 27 of 50 economists say unemployment at 5.5% or lower would prompt the Fed to tighten policy in mid-2015, while the other 23 say inflation below the Fed’s 2% goal would persuade it to hold off.
  • 53% of economists expect higher energy prices by mid-2015, 10% expect a further drop, and 37% see little change.
  • The personal consumption expenditure price index is projected to increase 1.4% in the year through June 2015.

Neil Dutta at Renaissance Macro Research said:

  • Employment is the dominant consideration in Fed policy, so expect a rate increase in June, perhaps earlier.
  • The drop in oil prices is primarily a function of a supply shock due to increased production from the US and Libya rather than diminishing demand, and is therefore less threatening to the inflation outlook.
  • The average hourly earnings series is not the best measure for labor costs.

Lou Crandall at Wrightson ICAP expects changes in conditions that make a higher inflation forecast plausible by mid-2015, including a pickup in wage growth and the end of falling commodity prices.

Stuart Hoffman at PNC Financial Services expects the Fed to start raising rates in July 2015 because it takes time for a tightening labor market to lead to a pickup in pay and then inflation.

Jan Hatzius at Goldman Sachs said:

  • Fed policy makers will not be quick to dismiss a shortfall in their inflation goal in deciding when to increase rates even as employment gains traction because the risks of a later liftoff have risen because inflation is the one area where the global market turmoil has shifted the outlook.
  • The impact on prices from a reduction in the unemployment rate is less precise and timely than the more direct effect of a drop in commodity prices
  • The Fed will start increasing rates in September 2015.

Sharon Stark at DA Davidson:

  • The first Fed rate increase will come in early 2016 because of mounting concern over too-low inflation.
  • Wage growth in the 3%-3.5% range is needed to give consumer spending and the economy enough of a boost to underpin inflation, and that is unlikely until unemployment falls below 5%.

Doug Handler at IHS Global Insight said:

  • The first Fed rate increase will come in June 2016, as rate volatility pressure will start weighing heavily in Fed decision-making.
  • To show that we can survive the onset of higher interest rates without an economic apocalypse is very important for business confidence.

Read the full article at http://www.bloomberg.com/news/2014-11-18/fed-dual-mandates-collide-as-drop-in-jobless-vies-with-inflation.html

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