Last week investors scrutinized the minutes from the Federal Reserve’s September 16-17th meeting for signs about the timing of an interest rate hike. This week investors will be analyzing incoming economic data in the market related to spending levels of Americans in the economy with retail sales and two inflation reports that are expected to shed more light about the health of the U.S. economy.
Retail sales for September will come into focus on Wednesday followed by the Fed’s Beige Book (October) and two inflation reports with Producer Price Index (PPI) on Wednesday followed by the Consumer Price Index (CPI) on Thursday.
During a October 9th speech in Milwaukee, WI at the CFA society Chicago Fed President Charles Evans maintained his dovish stance about raising interest rates and said that he is somewhat more accommodative than the views held by the majority of his colleagues.
Evans pointed out that he’s far less confident that the Federal Reserve will reach their 2 percent inflation target because of number of important downside risks to the inflation target and remains far less confident about reaching the Fed’s inflation goal within a reasonable time frame.
“Low energy prices and increases in the dollar continue to generate downward pressure on consumer prices” Evans admitted.
Evans said that with prospects of slower growth in China and other emerging market economies, low energy and import prices could exert downward pressure on inflation longer than he anticipates.
Evans used inflation data showing core PCE inflation, the Fed’s preferred inflation metric that removes volatile energy and food components, has averaged just 1.4 percent over the past seven years and 1.3 percent over the past 12 months.
The PCE price index has just risen 0.3 percent over the past year.
“Given the current low level of core inflation, some evidence of true upward momentum in actual inflation is critical to this assessment. I believe that it could well be the middle of next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation” Evans said.
Evans said that the best Fed policy is to take a very gradual approach to normalization and before raising rates, he would like to have more confidence that inflation is beginning to head higher and achieves their 2 percent inflation target in a symmetric fashion.
Evans explained that there is no problem in moderately overshooting the Fed’s 2 percent inflation target and said that after several years of inflation being too low, a modest overshoot simply would be a natural manifestation of the Federal Reserve’s symmetric inflation target.
Evans believes that after liftoff, it would be appropriate to raise the target interest rate very gradually “to give sufficient time to assess how the economy is adjusting to higher rates and the progress we are making toward our policy goals.”
Evans said that job growth has been quite solid for some time now and admitted that last month’s number was somewhat weaker than expected but still doesn’t change their overall view.
The next Fed policy meetings will occur on October 27-28th and December 15-16th.
Full Economic Calendar
Tuesday- Treasury Budget (Sept)
Wednesday- Retail Sales (Sept), PPI (Sept), Fed’s Beige Book (Oct.), Business Inventories (August)
Thursday- CPI (Sept), Initial and Continuing Claims, Empire Manufacturing (Oct.), Philadelphia Fed (Oct), Crude Inventories, Natural Gas Inventories
Friday- Industrial Production and Capacity Utilization (Sept.), JOLTS Job Openings (Aug), Michigan Sentiment (Oct), and Net Long Term TIC Flows (Aug).