Janet Yellen’s speech of September 24 articulated her views on inflation, concluding that below-2-percent inflation was attributable to special factors that would prove transitory. We assume that she still has that view. Even with oil prices now below $40 per barrel, the potential downdraft on future inflation from oil diminishes as we approach the minimum for oil prices in this cycle. Recent job growth has been good. U.S. payrolls increased by 211,000 in November following a robust gain of 298,000 in October. The U.S. unemployment rate held at 5.0 percent in November and is set to go lower soon. The weaker-than-expected job growth of August and September has been revised up from initial estimates and now appears to be anomalous. International economic conditions could be better, but the financial market volatility that spread from China in August appears to have stabilized. So the Federal Reserve’s criteria for ending zero interest rate policy, and raising the fed funds rate for the first time since July 2006 appear to be satisfied. We look for a small increase in the fed funds rate to a range of 0.25 to 0.50 percent on December 16.
Looking further ahead, several Federal Reserve officials have recently cautioned against assuming that there will be a highly predictable straight line path of the fed funds rate through 2016. The next dot plot, issued with the December 16 policy announcement by the Fed will be very informative. We expect that the center of the cluster of dots showing the expected fed funds rate at the end of 2016 will shift down slightly, and the grouping around 1.25 percent will tighten. This would be consistent with expectations for a 25 basis point increase in the fed funds rate occurring about every other meeting through 2016, beginning in March 2016. However, data dependency will remain the Fed’s modus operandi through 2016. Several Fed officials have recently cautioned against using a ruler to make your fed funds forecast through 2016.
Janet Yellen’s counterpart at the European Central Bank, Mario Draghi, announced last week that the ECB will extend its asset purchase program until at least March 2017. Financial markets were expecting more. The ECB’s failure to increase the pace of asset purchases, beyond the current 60 billion euros per month, reset expectations about the strength of the dollar versus the euro. The dollar gave up its November gain against the euro on the news from the ECB. We expect the dollar/euro to stabilize at year end as both the Fed and the ECB do the expected. Deviations from expected monetary policy and from expected economic performance on either side of the Atlantic could reset the exchange rate. For now, it looks like strong dollar is here to stay, putting ongoing pressure on U.S. exporters and on U.S. companies that compete in the domestic market against imported goods and services.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_12_2015.