Even the International Monetary Fund, which this week again urged the Fed to delay until next year, seems to agree.
“From what I read … the Fed has more or less the same interpretation of the implications of the events in Greece and China as we do, which is that they are not of major importance for the U.S. at this point, so it should not affect their choices in terms of monetary policy very much,” said Olivier Blanchard, the IMF’s chief economist.
WAIT A MINUTE
Even more to the point, both crises could melt away or be resolved, making the landscape come September or October look far less forbidding in financial markets than it does now.
While the IMF argues that the Fed should wait, at least in part because it fears the spillover effects if the dollar appreciates due to higher U.S. rates, the tone of the minutes, which reflect how the Fed was feeling and thinking in June, is more balanced.
The word ‘Greece’ occurs three times in the minutes, but the words ‘wage’ or ‘wages’ are used eight times, seven of which in a decidedly upbeat way.
“Several other participants indicated that, in their view, labor market slack had already been largely eliminated. The ongoing rise in labor demand appeared to have begun to result in a firming of wage increases,” according to the minutes of the June rate-setting meeting.
Officials will be looking for signs of wage pressures, especially given the strong evolution of data about job openings. The Labor Department’s Job Openings and Labor Turnover Summary (JOLTS), released this week, showed a new 15-year record in open positions in May.
One potential catch is inflation. Inflation remains below the Fed’s target of 2 percent and may face further downward pressure. Energy futures prices have been sinking, in part based on gloomy expectations about demand in China and the rest of Asia. This dynamic seems far more likely to delay a hike than concern about the losses of speculators in Chinese shares.
“Overall, we maintain our baseline outlook for a rate hike in September, given our conviction about incoming data and their signal about economic momentum,” economist Michael Gapen of Barclays wrote in a note to clients. “We are more willing to look through the anomalous Q1 outturn and believe subsequent data and pending revisions to GDP will signal the economy remains healthy.”
This would have been not far off consensus a couple of months ago but seems bold now. It is, however, easy to see the issues we obsess about now, such as Greece, receding rapidly in investors’ imaginations.
When September comes it will very likely all be about U.S. data. That may bring on a rate hike a good deal sooner than markets now expect.
If so, look for this to cause large immediate problems for two constituencies: emerging markets and investors in riskier instruments.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
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