I blogged August 18th (see Timing is not in the Fed’s Favor) that I didn’t think the Fed would put up interest rates in September. I was not alone in this 9 days ago but certainly in the minority. It seemed to me that recent economic data, most recently driven by the ongoing slow down in China, suggested too much risk and volatility. I felt then that the Fed would put off the increase until the New Year. Today another market watcher seems to agree: Stock Market Calls the Fed’s Bluff by Micael Pento. Well, what a week we have had so far.
The massive gyrations on the stock market’s around the world certainly attest to increased volatility. Worse, how can anyone make policy evaluations when there are just so many nervous twitches just waiting in the wings to trigger. I would have thought that the sneeze the markets’ experienced this week would vindicate my early call regarding September. Well, that was before today. Today we saw new data that increased U.S. GDP in Q2. See GDP Numbers Reveal Underlaying Momentum, Possible Headwinds for US Economy.
The U.S. Department of Commerce restated Q2 GDP from 2.3% to 3.7%. This restatement cannot be ignored. The size of the GDP figure itself, and the size of the restatement, is what many doves have been waiting for. This figure and the restatement helps build a platform for the long term GDP trend line (see WSJ article). This could be enough to justify the ‘sustained’ growth the Fed has been waiting for. It certainly is one of the yardsticks needed to justify a rate rise. Wage growth is another (still flat) and unemployment the third. So now I get an ugly feeling that the Fed may look at this data point and seriously put the oft talked about rate rise back on the agenda for September.
I think that would be a mistake. The GDP restatement is a good, healthy sign. But wages are critical here. We have little data that suggests GDP will drive wage growth; and additionally the capital investment needed to drive increased productivity, itself required to drive sustained GDP growth, remains all but lacking.
I think I’ll stick with my New Year forecast for rate rises. I’m just less confident now than I was 9 days ago. Oh well.