Through the second half of August, several Federal Reserve officials suggested that a federal funds interest rate hike may come sooner rather than later. In her speech at the Fed’s annual retreat in Jackson Hole , Wyoming, on August 26, FOMC chairwoman Janet Yellen began her remarks with two key statements. First, she said, “the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time.” Second, she continued with, “…the case for an increase in the federal funds rate has strengthened in recent months.” The case for a September rate hike was warming up. Labor data was looking better. The rebound in June and July job growth eased the fears of a cooldown in hiring that were spawned by the weak May employment report. Manufacturing indicators were looking better. Auto sales surged in July, back to a near-peak 17.9 million unit rate. The odds of September rate hike implied by the fed funds futures market began inching up. Inflation hawks were back on terra firma anticipating wage gains.
Then the data softened. Now the data-dependent Fed finds itself in data quicksand yet again. The August jobs report disappointed as it showed that payroll employment for the month increased by a less-than-expected 151,000 jobs. Taken in isolation this was not a terrible payroll number. It was well within the range of normal moderate job growth. But it did reflect a significant step down from the heady pace of job growth in June and July, which averaged 273,000 net new payroll jobs. The unemployment rate for August held steady at 4.9 percent, where it has been since June. Average hourly earnings ticked up by just 0.1 percent after increasing by 0.3 percent in July. Average weekly hours dipped to 34.3.
Then the ISM Manufacturing Index slumped back below the break-even 50 mark, hitting 49.4 in August. This is the first contractionary reading since the index regained momentum last March. Likewise, the ISM Non-Manufacturing Index took a significant step down in August, easing to 51.4, its weakest level since February 2010. Moreover, August auto sales cooled to a 17.0 million unit pace, adding yet another data point that makes the average 18.1 million unit rate from September through November 2015 look like the high water mark for auto sales in this cycle.
The members of the FOMC will not see enough U.S. data between now and their next meeting over September 20 and 21 to shake off any new doubts resulting from this recent round of soft data. So, the likelihood of a September fed funds rate hike appears to be receding. The implied odds posted by the fed funds futures market for a September 21 rate hike have slumped to 15 percent. If Janet Yellen wants to go ahead with a September rate hike, and not shock financial markets, she will need to send a clear signal of her intentions very soon.
We are not anticipating such a signal. The intentions of the data-dependent Fed have been thwarted by the data yet again. Despite what some members of the FOMC have stated, we believe that the Fed will not consider a November 2 rate hike due to the proximity of the presidential election on November 8. To wait this long and then to raise the fed funds rate right before the election would be to invite a torrent of criticism. For now, we are maintaining our forecast for one fed funds rate hike this year, coming on December 14.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicOutlook0916.