Why isn’t the Fed raising rates?

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Good morning. “OK, fine, we’re at war again, maybe.” That’s the oil price talking. It rose by a resigned rather than excited 5 per cent yesterday after the US said it was striking Iranian targets “to further degrade their ability to threaten freedom of navigation in the Strait of Hormuz”. How will we know when war has properly returned, or for that matter when a durable peace has arrived? Or is it ambiguity forever? Email us: [email protected].

Fed minutes

The first thing to say about the minutes from the June meeting of the Federal Open Market Committee meeting is that there were some. 

We don’t know how far new Fed chair Kevin Warsh is going to take his no-communications communications strategy. So Unhedged entertained the possibility that the minutes might read, in their entirety, “please see press release dated June 17”. Warsh aims for a Fed that says less as part of a larger project of withdrawing the monetary and fiscal anaesthetic which, he believes, markets have been labouring under since the financial crisis. That’s what we think he’s doing, at least. What he said about the strategy at his first press conference was incoherent, so we’re left to speculate.

After that press conference, the big question was “why didn’t the Fed just raise rates?” Warsh had said that inflation was too high and that inflation is everywhere and always a matter of monetary policy. So why not, erm, change the policy? The minutes, released yesterday, deepened this mystery. 

The picture that emerges is a committee that thinks employment is stable while inflation is too high and threatening to get worse. 

On balance, risks to the forecasts for employment and real GDP growth were seen as tilted somewhat to the downside. Risks to the inflation projection were seen as more skewed to the upside . . . 

With inflation having run significantly above 2 per cent over the past five years and in light of some emergent price pressures that appeared unrelated to tariffs or energy prices, the staff continued to view the possibility that inflation would be more persistent than projected as a salient risk . . . 

A few participants commented that . . . there was a case for raising the target range for the federal funds rate . . . 

So why not turn the knob a quarter point higher? I can think of two possibilities. Perhaps the committee is making an implicit distinction between average prices in the economy rising a bit quickly in response to one shock or another (a temporary phenomenon) and entrenched self-reinforcing inflation (which doesn’t die until the Fed kills it). This is an intellectually respectable distinction, but readers will not need to be reminded that it got the last chair into a bit of trouble. Or it may be that the committee hoped that the market, after some tough talk by a new chair, would tighten for them. We’ve seen a bit of that in the short end of the interest rate curve and in the futures market. 

But hawkish talk without hawkish action is not a long-term strategy when core inflation has been above target for years and is not improving. A so-so jobs market helps the committee stand pat (see next item). But it won’t take much of a change in the employment or inflation data to trigger tightening. 

Jobs revisited

Last we wrote that the lively increases in US payrolls in March, April and May had us thinking that the US economy might be reaccelerating. The slightly less good payrolls report for June, we hoped, was just a blip.

James Athey of the Marlborough Group, a longstanding friend of this newsletter and pointer-outer of our mistakes, wrote to do some pointing-outing. His view is that March, April and May, not June, was the blip. If you look at the broader picture of the job market, the trend remains thoroughly soggy. Some of the metrics he directed our attention to:

• The National Federation of Independent Business’s hiring index, which surveys small businesses about hiring plans, is softening again. Chart from the NFIB: 

Annoyingly, James is right. We should not be hypnotised by the payroll numbers, and looking at the larger picture, other signs of dynamism in the labour market are hard to find. The fact that this makes Fed rate increases a bit less likely is not much consolation. 

One good read

The end of good reads.

FT Unhedged podcast

Can’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.