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Interestraterise:economicindicatorsmeanhardchoicesforFedFT.com
Interest rate rise: economic indicators mean hard choices for Fed
Economic hotspots emerge across US economy despite sluggish wage growth
US economy: 2009 v 2015
If James Bullard is right, the US is more than ready to weather its first rise in short-term
interest rates for a decade.
To the hawkish St Louis Federal Reserve president, the US is entering a full-blown
economic boom and it is time official borrowing costs responded. Barring unexpected
shocks, you will see very strong labour markets and hopefully very strong growth as well,
he said in an interview on August 28.
Whether that view is shared elsewhere in the Fed will become clearer on September 17,
when the central bank holds its most scrutinised policy meeting since Janet Yellen took
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Yet the USs standout performance is reflected in sales generated by his own company,
which supplied the dredgers that opened the Panama Canal. For the first time in a decade,
he says, revenues are rising more rapidly in his own backyard than in emerging markets,
where they are flat.
Look at US GDP growth compared to the rest of the world, he says, singling out the
countrys resurgent construction sector, where spending is at a seven-year high, as well as
stronger outlays on transport and water projects.
Rick Rieder, chief investment officer of fixed income at BlackRock, argues that a string of
US indicators are flashing red and the Fed needs to act. His concern is less inflation, which
he argues is being suppressed by technological advances, than the financial distortions
wrought by ultra-low rates, notably excess debt in parts of the corporate debt markets.
When rates rise (http://next.ft.co
m/ig/sites/when-rates-rise)
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Interestraterise:economicindicatorsmeanhardchoicesforFedFT.com
As for the Fed, it would take more than a quarter-point rate rise to deter car buyers, Mr
Fitzgerald reckons. That is supported by economic modelling, with Oxford Economics
estimating an increase would shave just 0.1 percentage points off 2016 gross domestic
product growth.
However, what matters after a rate rise is the market reaction, rather than the raw quarterpoint increment itself, says Torsten Slk, international economist at Deutsche Bank. This is
harder to predict, and markets will place huge symbolic weight on the first move.
If traders are jolted into pricing a sharp set of subsequent increases in the face of
insistences to the contrary by the Fed the impact on world markets and the US
economy could be more damaging.
With the European Central Bank last week warning of downside risks from China-induced
turmoil, traders are still placing low odds on a September move. Global growth is at risk of
souring and commodity prices falling, meaning theres a risk of greater external drags on
an economy where inflation has persistently undershot forecasts.
Fear of unforeseen consequences helps explain political pressure from the left for the Fed
to hold fire especially at a time when wage growth in the US remains glacial.
Economists and central bankers attending a Kansas City Fed conference in Wyomings
Grand Teton National Park last month passed by dozens of green t-shirted protesters
from the pressure group Fed Up, which is calling on the central bank to keep rates at
near-zero given the muted wage growth affecting millions of Americans.
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Dawn ONeal, a teaching assistant earning $8.50 an hour, who was attending with the
group, says Fed officials should hold their conference in her part of Georgia, rather than
scenic Jackson Hole, to get a better idea of conditions for ordinary Americans.
Our life is a struggle it is hard to make ends meet at the end of the month. With the
Fed getting ready to raise interest rates, what is our economic future going to look like?
she asks.
Against that are the Feds own economic models, which suggest the US is hitting full
employment and that higher wages and inflation will surely follow. Balancing the
conflicting indicators will be ferociously difficult.
Stanley Fischer, the Fed vice-chairman, made the case for action (http://next.ft.com/conten
t/8365b084-4da3-11e5-9b5d-89a026fda5c9) in the coming months at the Wyoming
meetings. If policymakers wait for the evidence in favour of higher rates to become
overwhelming before they move, he says, they will already be too late.
Print a single copy of this article for personal use. Contact us if you wish to print more to
distribute to others. The Financial Times Ltd.
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