Bank of the West US Outlook Report for September 11, 2015

Bank of the West US Outlook Report: Start the Pre-Game Show

It’s almost game time. Like the pre-game show before the Super Bowl, we are hearing non-stop commentary about next week’s FOMC decision and Yellen press conference.  You are probably either tired of hearing about it by now, or so excited you’re already reaching for the nachos and settling in to watch the show.  So will they hike or not?  This is an extremely close call as we knew it would be, and there is more at stake than the Super Bowl. The FOMC decision is not a game and cannot be replayed, if the rate hike is “mistimed or poorly communicated”, it could have serious ramifications for our economic and financial future.


First let’s review the pre-game facts. The U.S. economic data for August and so far for September have come in firm enough to justify a modest initial interest rate hike next week. We got more evidence of U.S. labor market resilience this week with the Job Openings, Layoffs, and Turnovers (JOLTs) data.  Job openings hit a new expansion high at 5.8 million in July and reached their highest level ever recorded since this data has been collected, going all the way back to December of 2000.


However, continuing financial market volatility, low global inflation, and signs of renewed economic weakness abroad could be enough from a risk management standpoint to stay the FOMC’s hand until later in the year. The U.S. continues to import deflation.  Import prices for August were 11.4 percent below year ago levels, and haven’t fallen this much in a 12 month period since the Great Recession.


The FOMC probably doesn’t want to risk piling on more financial market instability at a time when downside risks from the global economy are on the rise. The fact that Fed funds futures are only giving a 28% probability to a September rate hike means the market reaction to a September move could lead to a more violent reaction than usual in the financial markets.


The consensus among economists is closer to a 50/50 with a slight shift toward an October or December initial hike. The FOMC has two more meetings scheduled in October and December this year.  Chair Yellen has been careful not to tip her hand or promise a rate hike in September, but has kept to her, “by year-end” statements.


A September rate hike from the Fed, if it occurs next week, shouldn’t be the end of the world for the U.S. economy, but it could be a big problem for stocks and bonds, China, emerging markets, and the global outlook.  A delay into October or December appears most likely. At any rate, it should be a close game when the FOMC meets next week. Now where are my nachos?


To find out more, check out this week’s US Outlook Report.

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