American interest rates: Advantage: Doves

by / Thursday, 20 August 2015 / Published in Economy

THE combination of weaker-than-expected CPI inflation and some dovish comments in the minutes of the Federal Reserve’s July meeting have caused the dollar, and yields on Treasury bonds, to fall. The traders are hopefully forecasting that the chance of a September rate rise is receding. The case for tightening monetary policy next month looks increasingly frail.Consumer prices are only 0.2% higher than a year ago. Inflation continues to languish close to zero due to cheap oil and the effect of a strengthening dollar on import prices, both factors which the Fed regards as transitory. However, if the world economy is slowing—as others fear—they can be expected to persist. Weak demand overseas will weigh on both commodities and foreign currencies.In any case, there is no significant inflationary pressure, on today’s reading or looking at expectations. The Fed’s staff project that inflation will remain below its 2% target over 2016 and 2017, and market measures of inflation expectations remain weak. A tightening in September would cause these expectations to sag further, because a rate rise is currently viewed as a possibility, not a certainty.The main argument of the hawks is that spare capacity in the labour market is disappearing as unemployment falls. Indeed, expectations of an interest rate rise surged following satisfactory job numbers in July. But tightening in the …
Source: The Economy