Fed Reserve Rate Decision In Focus This Week; Falling Oil Complicates Rate Hike

dfrFalling oil prices along with a strong U.S. dollar weakens inflation pressure and complicates expectations of an interest rate hike in December

-written by Johnathan Schweitzer

Attention will shift this week to the U.S. Federal Reserve’s 2 day monetary policy meeting that ends on Wednesday with a looming decision coming about raising interest rates which remain at historic lows and hasn’t increased since 2006.

On Wednesday investors will also pay close attention to updated economic projections from the Federal Reserve along with commentary from Fed Chair Janet Yellen about the economic forecast during a press conference.

Consensus forecasts are weighed heavily on the side of an interest rate hike at the December Fed meeting this week fostered by an improving labor market and signs of decent growth in the U.S. economy.

Improving Economic Indicators

The U.S. Labor Department reported a strong employment on December 6th that revealed the U.S. economy added 211,000 non-farm payroll jobs in November while the unemployment rate was unchanged at 5.0 percent. The October’s job number was also revised higher to 298,000, the highest monthly gain in 2015.

Over the past 12 months, the U.S. economy has averaged a monthly gain of 237,000 non-farm payroll jobs, a solid number that reveals the U.S. labor market is healthy and on the right track.

According to the 2nd U.S. GDP estimate for the 3rd quarter of 2015 economic growth increased by 2.1 percent.

In the 2nd quarter real GDP increased 3.9 percent.

All of those economic indicators point to a U.S. economy that is growing stronger despite tepid international growth led by a weakening Chinese economy that has slid to a growth rate below 7 percent and well below the reported 10 percent GDP growth in 2010.

Falling Oil Prices, Strong U.S. Dollar, and Weak Inflation Could Make Raising Interest Rates Difficult

The steep decline of crude oil prices in recent days may be good news for consumers of oil as prices fall but tumbling crude oil prices weaken inflation pressures and alongside a strong U.S. dollar, commodities face considerable pressure.

The confluence of economic factors clouds the picture for committee member in the U.S. Federal Reserve to believe the inflation will move closer to their 2 percent inflation target. It also gives them less confidence to increase interest rates in this type of economic climate.

On Friday NYMEX crude fell $ 1.41 or -3.84 percent that helped to spark a -1.76 percent decline in the Dow Jones, a -1.94 percent slide in the S&P 500, and a -2.21 percent drop with the Nasdaq.

For the week, crude oil declined 11 percent and is now at $35.36 a barrel, retracing from a 52 week high of $65.56 and dropping to 2008 levels that occurred during the global recession.

Crude oil has been in a free fall following a December 4th OPEC decision to maintain production levels at their current high levels despite a glut in oil and weaker international growth.

The IEA also recently announced that oversupply would continue through much of 2016 even with demand weakening.

Once sanctions are lifted on Iran in the coming months, even more oil is expected to be sold in global markets.

Influential OPEC member Saudi Arabia has been showing little appetite for losing market share through a production cut and prefers instead to tap into their large financial reserves and pressure more U.S. shale companies to go out of business.

As the price of crude oil drops, the net impact is falling inflation which has already come under pressure in late 2014 and throughout 2015.

The Fed’s preferred inflation gauge, core PCE inflation, rose just 0.6 percent annualized rate in October.

Core PCE inflation which strips out food and energy costs, is at 1.28 percent in October while the Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.3 percent in October when energy prices were rising.

Falling crude oil prices make it more challenging for Fed committee members to feel confident that U.S. inflation is heading back to its 2 percent target and could result in a delayed interest rate hike at the Fed’s policy meeting this week.

Week Ahead

On Monday the market will digest another inflation reading, Core CPI, for November.

Economists from briefing.com forecast a rise of just 0.1 percent from 0.2 percent in October.

Core CPI is expected to increase 0.3 percent from 0.2 percent in October.

Wednesday will be the big day for the market since the interest rate decision will be made at the conclusion  of the Fed’s 2 day policy meeting.

Economists from briefing.com forecast an interest rate increase of .25 percent to .50 percent.

Tuesday- CPI inflation (Nov), Empire Manufacturing (Dec), NAHB Housing Market Index (December)

Wednesday- FOMC rate decision- updated forecast and press conference, Building Permits and Housing Starts (Nov), Industrial Production (Nov), Capacity Utilization (November), MBA Mortgage and Mortgage Purchase Index (12/12), crude inventories (12/12)

Thursday- Continuing and initial jobless claims, current account balance (3rd quarter), Philadelphia Fed (Dec), leading indicators (November), natural gas inventories (12/12)

-Johnathan Schweitzer         schweitz31@gmail.com










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