Home News Insight into the US FOMC Meeting in September 2017

Insight into the US FOMC Meeting in September 2017

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Written By: Adrian Moore – Forex Focus

The FOMC (Federal Open Market Committee) will be holding its sixth policy meeting of 2017 from September 19-20, after the Board of Governors of the US Federal Reserve System voted unanimously to leave its key interest rate unchanged in July. Before going into the likely outlook of the FOMC meeting in September, let’s go through some of the key points from the FOMC policy meeting in July, a preview of the economy from the standpoint of the most recent Beige Book survey and the performance of some of the key economic indicators in the United States in August to early September.

Following its monetary-policy meeting in July, the Federal Reserve in a press release revealed that from the start of 2017:

  • The labour market is healthy, and economic activity in the country is rising moderately.
  • Job growth is expanding with unemployment rate declining, and the monetary policies of the Fed could lead to further improvements in the job market.
  • Household spending is rising and so are fixed investments by businesses.
  • Inflation over a 12-month period is below the central bank’s target of 2 percent and is expected to remain low in the near-term.
  • To support further gains in the labour market and to see a sustained rise in inflation levels, the bank maintains its accommodative stance by leaving the federal funds rate unchanged at 1-1.25 percent.

The Fed persisted with its neutral view on the timing of and way in which it would go about adjusting interest rates in the future. The Fed also stated that it would start implementing procedures to normalize the balance sheet in the near future, as long as the broader economy continues to expand as expected.

The Fed’s Beige Book summarises the prevailing economic conditions in the 12 Federal Reserve Districts in the US and is released two weeks prior to the forthcoming Federal Open Market Committee meeting. The report is compiled based on information provided by a large number of businesses, community contacts, banks, economists, market experts and other sources outside the Federal Reserve System.

Following are some of the key takeaways of the most recent Beige Book, which was released on September 6, 2017, and is based on information collected up to August 28:  

  • Employment growth slowed moderately in most districts, with labour shortages reported in the manufacturing and construction industries.

  • Wage growth rose moderately in some districts due to the tight labour-market conditions.

  • Moderate rise in prices across the country, with input prices rising faster than their output counterparts.

  • Low inventories resulted in home prices moving up in most regions.

  • Retail spending is expected to have picked up in July and August.

  • Vehicle sales registered mixed growth across districts.

  • Consumer confidence slipped from multi-year highs in some states.

  • Business activity in the manufacturing sector expanded at a brisk pace, and manufacturers are generally optimistic about the near-term growth outlook.

  • The broader service industry, with the exclusion of a few sectors, reported modest increases in business activity and maintained a positive outlook in the near-term.

The Beige Book maintained that economic activity across all the districts expanded at a modest to moderate pace in July and August, with some concerns in the auto industry. According to Autodata, total vehicle sales slipped 2 percent in August from a year earlier, as inventories continued to pile up and prices of used vehicles declined, driving the industry’s sales figures to their lowest in three years. However, there could be some positive news for the sector going ahead as the destruction caused by the recent hurricanes in the US could lead to higher vehicle sales in the near-term, thereby shoring up the industry somewhat.

Following are the highlights of some of the key economic indicators in the US from August to the first week of September of this year:

  • GDP (gross domestic product) rose at an annual pace of 3 percent in second quarter 2017, following a 1.2-percent rise in the first quarter.

  • Personal income rose 0.4 percent in July, with disposable income and personal consumption expenditures rising 0.3 percent correspondingly.

  • Home-ownership rate registered an increase of 0.8 percent in the second quarter, compared to the same period a year earlier.

  • Retail and sales of food services increased 0.6 percent in July from 0.5 percent a month earlier.

  • Business inventories rose 0.5 percent in June, with sales expanding at 0.3 percent compared to the previous month.

  • Seasonally adjusted housing starts on an annual basis declined 4.8 percent in July compared to the June figures, while sales of single-family homes slumped 9.4 percent during a similar period.

  • The advanced report on new orders for manufactured durable goods fell 6.8 percent in July, after rising close to three-year highs in June.

  • International trade deficit in July increased slightly to $43.7 billion from $43.5 billion in June.

  • Monthly wholesale inventories were up 0.4 percent and retail inventories down 0.2 percent respectively in July compared to the previous month.

  • Seasonally adjusted PAT (profit after tax) for companies with assets greater than $50 million rose to $43.7 billion in the second quarter, from $2 billion in the first quarter 2017.

  • Total revenue from selected services increased 3.2 percent in the second quarter from 1.3 percent in the first.

From the broader economic standpoint, the US economy looks in good shape midway into the second half of 2017, although there are a few glitches in some of the recent economic releases. While profits of most of the listed companies in the S&P 500 Index showed robust growth, there are a number of underlying factors such as wage growth, consumer spending, auto and home sales that need to expand significantly. Inflation, which has averaged around 1.5 percent in the last three years, is another area of concern. According to a recent speech by Fed Governor Lael Brainard in New York, the persistently low inflation in the country may not be due to transitory factors but could be driven by a more depressed underlying inflation.

The Fed governor also made a comparison between the current unemployment and inflation rates with the 2004-07 period, when the US economy was near full employment and inflation was higher than 2 percent, thereby making the point that policymakers should hold on to the current federal funds rate and remain extremely cautious when it comes to raising it. She, however, supported the view that the Fed should start reducing the assets on its balance sheet.

Although Lael Brainard ’s outlook on inflation reflects that of the overall view of the central bank, a large number of economists would beg to differ with the reasoning offered by the governor. With only a few days left before the FOMC meets, markets have already factored in a NO CHANGE stance by the Fed and are instead focusing on what the Fed meeting will dish out in terms of its asset-sale program.

 

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