On Friday U.S. Federal Reserve Chairwoman Janet Yellen will give a keynote speech at the Jackson Hole Symposium in Jackson Hole, Wyoming sponsored by the Federal Reserve Bank of Kansas City that will address important issues facing the U.S. and other world economies.
Investors will be paying close attention to Yellen’s views about the economy which comes after central bankers at the Federal Reserve were split about raising interest rates at their last policy meeting in July, according to the latest released minutes from the Federal Reserve last Wednesday.
Setting The Stage For A Rate Hike In 2016
Last week, Federal Reserve Bank of New York President William Dudley and Federal Reserve Bank of San Francisco President John Williams spoke in clear hawkish language about the likelihood of the U.S. Federal Reserve raising interest rates in 2016 which comes after 2 consecutive months of strong non-farm payroll growth in the U.S. economy, improving inflation levels, and reduced global risks.
Last Tuesday, Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, also signaled a hawkish sentiment when he told the Rotary Club of Knoxville, “I think at least one increase of the policy rate could be appropriate later this year.”
On Sunday Fed Reserve Vice Chair Stanley Fischer spoke before the Aspen Institute in Aspen, Colorado and admitted “We are close to our targets.”
Fischer pointed out that inflation has been moving closer to the Fed’s 2 percent inflation target.
“Although total PCE inflation was less than 1 percent over the 12 months ending in June, core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent–and the core consumer price index inflation rate is currently above 2 percent” Fischer said.
Fischer explained that U.S. employment has held stead in the midst of global headwinds that threatened to weaken the U.S. economy.
“During the past two years we have been concerned at various stages by the possible negative effects on the U.S. economy of the Greek debt crisis, by the 20 percent appreciation of the trade-weighted dollar, by the Chinese growth slowdown and accompanying exchange rate uncertainties, by the financial market turbulence during the first six weeks of this year, by the dismaying pothole in job growth this May, and by Brexit–among other shocks. Yet, even amid these shocks, the labor market continued to improve: Employment has continued to increase, and the unemployment rate is currently close to most estimates of the natural rate” Fischer said.
Over the past week, four influential Fed members have all laid out the groundwork for Fed Chair Janet Yellen to continue with the hawkish theme later on Friday during her keynote speech before the Jackson Hole Symposium.
It would be a surprise to the market if Fed Chair Janet Yellen ignored the recent hawkish sentiment from 4 influential Federal Reserve Committee members and suddenly gave a dovish speech.
Despite all of the hawkish language that has come to the surface in recent days, the CME’s Fed Watching tool shows that the market is not betting on or at least pricing in an interest rate hike anytime soon in 2016.
According to the CME Group, the current probability of a 0.25 percent basis point increase with the federal funds which would increase the Fed’s prime interest rate to 0.50- 0.75 percent is currently standing at just 12 percent for the Fed’s next policy meeting in September (20-21st) and 39.1 percent at the Fed’s December policy meeting which occurs from December 13-14th.
The upcoming U.S. presidential election in November is one mitigating factor that could complicate and ultimately serve to delay the Federal Reserve hiking interest rates in September.
The Week Ahead
On Tuesday IHS Markit will release their flash Markit U.S. manufacturing PMI while Germany, France, and the euro area will receive composite PMI readings.
New home sales for July will also be reported on Tuesday.
On Wednesday existing home sales for July will be released.
Economists from briefing.com have a consensus estimate of 5.54M existing home sales in July which would be slightly lower than the 5.57M in June.
Durable orders for July will be reported by the Department of Commerce on Thursday.
Economists from briefing.com have a consensus estimate of +3.5 percent in July after a -4.0 percent slide in June.
On Friday the 2nd estimate of 2nd quarter U.S. GDP will come into focus.
Economists from briefing.com have a consensus estimate of 1.1 percent after a 1.2 percent increase during the 1st estimate.
Michigan sentiment (final) for August will also be reported on Friday.
Full U.S. Economic Calendar
Tuesday- IHS Markit flash U.S. manufacturing PMI, New Home Sales (July)
Wednesday- Existing Home Sales (July), FHFA Housing Price Index (June), MBA Mortgage Index (8/20), Crude Inventories
Thursday- Initial and Continuing Jobless Claims, Durable Orders (July), Natural Gas Inventories (8/20)
Friday- 2nd estimate for 2nd quarter U.S. GDP, International Trade in Goods (July), Michigan Sentiment (final- August).