Posted October 30, 2015 Nick Hanspal
At the beginning of 2015, the likelihood of an imminent increase in the U.S. interest rate seemed high. The unemployment rate had been gradually falling from its high of 10% in October 2009, to 5.7% in January 2015. On December 17th 2014, the Fed revealed that its long term full employment rate target was between 5-5.2%. With the most recent September unemployment rate revealed as 5.1%, it seems that full employment for the US is within reach. This along with a healthy GDP growth rate in Q2 2015 of 3.9%, above the expected 3.7%, indicates that the US economy is performing well.
So why have interest rates not increased? Possibly because some recent US data has been below expectations. An unexpectedly low Non-Farm Payrolls figure of 142,000, showed that fewer jobs were being added to the economy. In addition there has been limited real wage growth, meaning that increasing interest rates would only reduce the real income of American citizens.
Another reason is to do with inflation. The U.S. inflation target is 2% and since inflation has not reached this threshold, the FOMC is reluctant to increase rates. As soon as the rapid fall in the price of oil and other commodities over the past year is discounted from CPI calculations, inflation should increase from around 0% to 1%. However inflation is still not anywhere near their target.
The current strength of the dollar is also hurting US exports. The dollar index has increased by 14% since this time last year. Increasing interest rates would further strengthen an already strong dollar, as demand for the dollar would rise.
Some positive data has been released. U.S. PMI for October according to Markit came in at 54, which is above expectations, and well above the previous value of 53.1 in September. This suggests the manufacturing sector is getting back on track, which will hopefully be confirmed by an increase in Durable Goods Orders. But until inflation and real wages rise and there are signs of growth in other significant countries, the FOMC will most likely remain dovish. It is my opinion that it is unlikely we will see an increase in interest rates until at least March next year.