With economic view hazy, a wait-and-see Fed message expected

AP News
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Posted: Jun 13, 2016 11:51 AM
With economic view hazy, a wait-and-see Fed message expected

WASHINGTON (AP) — It's all about the data.

For months, the Federal Reserve has said that once economic data showed a consistently healthy economy, it would be time to resume raising interest rates. And for almost as long, the data has shown improvement and suggested that a rate hike was likely this summer.

That was then.

This month, when the government issued a surprisingly bleak hiring report for May, it suddenly raised doubts about the health of the job market. And it caused most Fed-watchers to put off their predictions for the next Fed rate hike into the fall.

So when the Fed issues a statement after a policy meeting ends Wednesday and Chair Janet Yellen holds a news conference, a wait-and-see tone is expected. The Fed will likely echo the message Yellen sent in a speech last week: That while the U.S. economy looks fundamentally solid and higher rates will come eventually, too many uncertainties exist to say when the Fed might raise rates again.

Among the uncertainties Yellen highlighted is a June 23 referendum in Britain over whether to leave the European Union. A yes vote could roil financial markets, and the Fed wouldn't likely want to further unnerve investors with a rate hike just a week before that vote.

Economists who foresee no rate hike before September say the Fed won't have a clear enough picture of the economy before then to raise rates and make borrowing more expensive.

The biggest uncertainty is whether the job market has succumbed to a prolonged slump or is merely enduring a brief pause. The government's May jobs report showed that employers added just 38,000 — the weakest monthly gain in five years — and that job growth has averaged only 116,000 the past three months, down from an average of 230,000 in the 12 months ending in April.

Other economic barometers have also sowed doubts — from tepid consumer spending and business investment to a slowdown in worker productivity to stresses from China other major economies.

And inflation has remained persistently below the Fed's 2 percent target.

"While the global economy has stabilized in the sense that it is not dropping like a rock, global economic growth remains anemic at best," said Sung Won Sohn, an economics professor at California State University, Channel Islands. "Given all the uncertainties on economic growth and continued low inflation, there is no need to rush to hike interest rates."

Sohn foresees just one Fed rate hike this year, probably in September, with the central bank then moving to the sidelines in the closing weeks of the presidential race.

But Diane Swonk, chief economist at DS Economics in Chicago, said she thinks the Fed could raise rates in July if the June jobs report shows a robust rebound and financial markets remain calm after Britain's vote on leaving the EU.

" I think there would be enough people on the Fed who would be ready to move," she said.

Swonk is predicting two rate increases this year, most likely in July and December.

The Fed raised its key policy rate modestly in December from a record low near zero, where it had been since the depths of the Great Recession in 2008. And it projected that it would raise rates four more times in 2016. But as the year began, oil prices plunged, and concerns escalated about China, the world's second-largest economy. Nervous investors sent markets sinking, and fears arose of a new recession. The Fed put any further rate hikes on hold.

Yellen and other Fed officials have said they expect to raise rates gradually after the job market shows further signs of improvement, including higher pay increases and inflation moving closer to the Fed's target.

Fed officials keep stressing that their policymaking is "data dependent." That is, only when the data shows the economy edging consistently toward full health will they resume raising rates.

Conversely, the Fed also wants to take care not to lead investors to inflate the prices of stocks and other assets out of a mistaken belief that it will keep rates ultra-low well into the future. The need to discourage such excessive risk-taking is why even analysts who think the economy still faces challenges predict that the Fed will nevertheless raise rates at least once this year.

"One rate hike this year will tell markets that the Fed is doing its job in moving to slowly normalize rates," said Brian Bethune, an economics professor at Tufts University. "The Fed wants to keep markets' feet to the fire, but they do not want to hike rates so much that they exacerbate an economic slowdown. They want to turn the crank slowly."