US Economic Update – 25 August 2014
US inflation cools, Fed minutes see policy doves holding sway; rate expectations begin to recede
US markets rose last week as poorer than expected inflation figures and a lingering sense of dovishness among policy makers drove investors to increase bets that rates would stay low for longer.
In detail, the Core CPI measure which strips out volatile food and energy came in at just 0.1%; which compares poorly against expectations of a 0.2% reading. This was while overall CPI (inc food and energy) fell in line with expectations to 0.1%, down from 0.3% the month previously.
In addition to lower inflation, FOMC meeting minutes, released on Wednesday, highlighted ongoing concerns among voting members as to just how much slack was left in the economy. On a brighter note, both housing starts and new issue building permits increased ahead of expectations for the month of July.
Following 14 months of persistent under-performance the up-tick in housing activity will come as a relief to policy makers and should provide hope that the US real estate industry can weather the challenges of a higher rate environment.
All in all, economic growth has rebounded at an above trend pace during the second quarter and the Federal Reserve is likely to continue to reduce the rate of asset purchases over the next one to two months however; concerns still exist among some policy makers over the likely level of “underutilisation” in the labour market.
With this and the week’s inflation figures taken into account we do not foresee a sudden or rapid tightening of monetary policy taking place this year or within the 1st quarter of 2015.
Our view remains that, although the current pace of momentum behind economic growth will likely increase as we head into the new year, the FOMC is likely to stand behind previous assurances that a tightening of policy will not take place until “some time” after the withdrawal of monetary stimulus.
This we take to mean that the FOMC will require a period of roughly six months to observe the effects upon the economy of reduced policy accommodation. With the final reduction to the pace of asset purchases expected in September or October, most likely September, we see the close of Q1 2015 as the point in time when US policy makers will be more willing to consider raising rates.
Dow Jones at 10 Minute Intervals
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