The Fed in September: Eye of the storm?

The Fed in September: Eye of the storm?

The need for ready cash for disaster relief could factor into the Fed’s next move; The European Central Bank (ECB) sets a timeline; currencies grab the headlines; UK jobs boom raises Brexit issues.


“In many areas of the jobs market candidate supply cannot meet demand.”
Kevin Green of the UK-based Recruitment & Employment Confederation, a job agency trade group

The Fed: Whether the weather The market for fed funds futures appears to have decided – at least for now – that a Fed rate hike is off the table for the balance of the year. But there’s no such indicator for the next move by the Federal Open Market Committee (FOMC) regarding the unwinding of its $4.24 trillion mountain of securities, bought as part of the post-2008 rescue of the global financial system. The Fed has signaled clearly their desire to start the process this year, but the precise method and timing aren’t yet known. More information on both might be forthcoming on September 20, when the FOMC holds a scheduled press conference after its 2-day meeting that week.

One of many factors to weigh: the impact of that unwind – which could remove some badly-needed cash from the U.S. financial system just as the need for it spikes as part of the upcoming disaster relief in the wake of Hurricanes Harvey and Irma.
 

European Central Bank (ECB): Setting expectations In his remarks after the September ECB meeting, President Mario Draghi was clear about the intention to consider the unwinding of its quantitative easing (QE) program at its October meeting. While this was the most specific guidance on the matter yet, the ECB’s track record on following through is subject to debate. With Europe’s recovery widely visible and seemingly solid, the plan would seem well-timed – except for the climb of the euro currency, which makes some of the ECB’s objectives harder to reach.
 

The Euro: Too much too soon? An inconvenient side-effect of the ECB’s meeting: the euro rose even further against the U.S. dollar. As of mid-morning September 8, the euro traded at about $1.202, over 14% above its level at the beginning of 2017.1 On balance, the currency’s continued resurgence is a significant challenge to the eurozone’s continued recovery; the rise increases the price of exported Europe-made goods, acting as a downward force on manufacturing growth. European consumers who buy imported goods will see prices soften, but that could also make the ECB’s goal of 2% inflation even more difficult to achieve.
 

UK: Higher starting pay, but for whom? A sign that Brexit and its presumed immigration controls are already being keenly felt: the Recruitment and Employment Federation (REC), a UK trade association, reported in a press release that the growth of permanent starting salaries accelerated for the fourth month running in August, the quickest rate of pay inflation seen since October 2015. Little wonder; the availability of candidates to fill permanent job roles declined “sharply” and staff vacancies were reported to have risen at the quickest rate in 28 months. The REC sees immigration controls as a key factor in the developing labor shortages, saying it is “essential” that the government adopt “an evidence-based immigration system that will support the economy”. 

 

1 Source: Bloomberg, September 8 2017, 10:45 AM ET

 

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