“In light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States,” Fed Chairwoman Janet Yellen said Thursday at a press conference following a two-day policy meeting.
(…) Most of the policy makers at the meeting, 13 of 17, indicated they still expect to move this year, but that was down from the 15 who held that view in June. The central bank has two more scheduled policy meetings this year, in late October and mid-December. (…)
“An argument can be made for a rise in interest rates at this time,” she said. “On balance, labor market indicators show that underutilization of labor resources has diminished since early this year,” the Fed said in its policy statement.
But she said officials decided to hold off “in light of the heightened uncertainties abroad” and the prospect of low inflation for a longer period. The Fed wants “a little bit more time” to make sure the U.S. economic outlook hasn’t fundamentally shifted, she said. (…)
“Developments that we saw in financial markets in August, in part, reflected concerns that there was downside risk to Chinese economic performance and perhaps concerns about the deftness in which policy makers were addressing those concerns,” she said. (…)
“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term,” the Fed said in the official policy statement released by the central bank after the meeting. It added that it was “monitoring developments abroad,” a signal of the Fed’s heightened state of worry that slow growth outside the U.S. could hurt the American economy. (…)
Officials have become a bit less optimistic about the economy’s long-run growth potential. They projected the economy will grow at a rate between 1.8% and 2.2% per year in the long-run, down from their June estimate of growth of 2.0% to 2.3% in the long-run. (…)
Fed officials reduced their estimates for the path of the unemployment rate. They see it reaching 5.0% by year end and 4.8% by the end of next year, a lower rate than previous estimates of 5.3% and 5.1% respectively. (…)
But officials reduced their inflation estimates, thanks in part to downward pressures from lower oil prices and a stronger dollar. They don’t see the inflation rate, as measured by the Commerce Department’s personal consumption expenditures price index, reaching their goal of 2% until 2018, near the end of Ms. Yellen’s first term as chairwoman.
“We would like to bolster our confidence that inflation will move back to 2%. And of course a further improvement in the labor market does serve that purpose.”
More stuff:
- The surprising thing coming out of the Federal Reserve’s meeting on Thursday wasn’t so much policy makers’ decision to keep rates on hold. Rather, it was that what had been expected to be a closely fought decision on whether to raise rates for the first time in nine years doesn’t seem to have been very contentious.
- Underscoring the lower-for-longer view, updated projections showed that Fed officials expect to raise their target range on overnight rates just once in their two remaining meetings this year. And several were calling for no change.
- Moreover, the median, longer-run projection for overnight rates fell to 3.5% from 3.75% in June, and 4% at the start of last year. So, even when the storm from overseas passes, officials don’t think rates will need to be as high as they used to.
- Core [PCE] inflation, which excludes food and energy prices, is expected to run at 1.4% [in Q4’15].
In a nutshell, the FOMC got spooked by China and depressed commodity prices. It now sees the U.S. economy growing at 2.1% this year (was 1.9%), 2.3% in 2016, 2.2% in 2017 and 2.0% in 2018. Given this slow growth and low commodity prices and a strong dollar, core inflation is not seen reaching the magic 2% level until 2018 (2016: +1.7%, 2017: +1.9%).
In effect, no lift-off in this forecast! This is pretty major change. Just consider what Stan Fischer said on August 28 at Jackson Hole:
Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding inflation down—oil prices and import prices, particularly—dissipate further.
[The Fed shouldn’t] wait until inflation is back to 2% to begin tightening.
And what Jeffrey Lacker (the sole dissenter) said on September 7:
The second condition the FOMC laid out for raising interest rates was that it would have to be “reasonably confident that inflation will move back to its 2 percent objective over the medium term.” The last half year of data show that inflation already has returned to our 2 percent objective.
(…) When push came to shove – and in a break with history during a non-crisis period for the global monetary system – Fed officials decided to allow international issues to play a decisive role in the determination of domestic interest rates; and they did so because of concerns about a possible two-way causality that are strong enough to offset what is a rather solid internal case for initiating now the interest rate normalisation process (particularly impressive job creation and emerging evidence that stronger wage growth is likely to put upward pressure on energy-depressed inflation rates).
First, and foremost, central bankers seem worried that a rate hike now could inadvertently fuel further financial volatility abroad, accelerating the retreat of investors from risk assets. This “quantitative tightening” would add to general financial market instability, undermining the key notion that central banks are both able and willing to repress financial volatility.
Second, and equally important, they seem worried that this would, in turn, further undermine growth – particularly in the emerging world where a generalised growth slowdown is increasing the risk of financial accidents – and thus spill back to the US. This would weaken what remains a sub-par recovery here. (…)
At one level, many market participants will welcome the delay to an interest rate hike, seeing this as timely confirmation that the Fed remains their best friend, still deeply committed to a volatility-repression regime. But several will regret the general uncertainty associated with the continuing focus on – or more accurately, obsession with – the timing of a first rate hike. And some will wonder what Fed officials are signaling about the underlying fragility of global financial conditions, particularly in the emerging world.
(…) as signaled by the revisions to the “blue dots,” Fed officials are now also anticipating the “loosest tightening” in the institution’s modern history: one that will be characterised by a very shallow path, stop-go sequencing and a lower end point. (…)
FYI, there is a Bloomberg video on this here.
Currencies in Brazil, Turkey and South Africa, which have been among the hardest-hit by fears of a U.S. rate increase, enjoyed a short-lived reprieve after the central bank’s announcement. But they gave back all the gains within hours, as investors realized the Fed is still on track to raise interest rates later in the year. Many investors said the Fed’s reluctance to raise rates on Thursday signaled policy makers’ concerns about slowing global growth, which reflects a deepening economic malaise across emerging markets. (…)
Since Aug. 12, emerging markets have experienced outflows for 35 consecutive days, the longest streak since the taper tantrum, when outflows lasted for 36 days, according to the Institute of International Finance, which bases its calculation on a seven-day moving average. In August, global investors yanked a total of $4.5 billion from emerging-market stocks and bonds, the biggest outflow since December 2014, according to IIF.
Markets Fall After Fed Stands Pat on Rate Rise Most global stock markets fell after the U.S. Federal Reserve decided not to raise short-term interest rates off record lows, citing global economic and market turbulence.
The Stoxx Europe 600 was recently trading 1.4% lower, mirroring losses in the U.S. after the announcement Thursday. Japan’s Nikkei Stock Average fell 2%, although markets elsewhere in Asia gained. (…) The Shanghai Composite ended the session 0.4% higher.
PHILLY FED: “Manufacturing Conditions Were Mixed in September”
Manufacturing conditions in the region were mixed in September, according to firms responding to this month’s Manufacturing Business Outlook Survey. The indicator for general activity fell into negative territory, but indicators for new orders, shipments, and employment remained positive. Evidence (?) suggests that the responses regarding general activity that were received earlier in the month may have been negatively affected by the volatility in the stock market and international news reports.
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 8.3 in August to -6.0 this month. This is the first negative reading in the index since February 2014. However, the demand for manufactured goods, as measured by the survey’s current new orders index, showed continued growth: The diffusion index increased from 5.8 to 9.4. Firms reported that shipments also continued to rise. The current shipments index remained
positive but fell 2 points, to 14.8.
The current employment index increased 5 points, its highest reading in five months. Firms also reported, on balance, a modest increase in the workweek
similar to August.
With respect to prices received for manufactured goods, the percent of firms reporting lower prices (17 percent) exceeded the percentage reporting higher prices (12 percent) for the second consecutive month. The prices received index was virtually unchanged from August at -5.0.
In this month’s special questions, firms were asked to estimate their total production growth for the third quarter ending this month along with expected growth for the fourth quarter. Firms anticipating increases in third-quarter production (46 percent) edged out those anticipating decreases (42 percent). However, the median production growth expected by firms for the third quarter was essentially unchanged from the second quarter. With regard to the fourth quarter, the percentage of firms forecasting acceleration in the rate of production growth (41 percent) was only slightly greater than the percentage forecasting deceleration in growth (39 percent).
U.S. housing starts fell 3% from a month earlier to a seasonally adjusted annual rate of 1.126 million last month, the Commerce Department said Thursday. Starts on single-family homes, which account for nearly two-thirds of the market, fell to 739,000. Multifamily units, which include apartments and condominiums, fell to 387,000.
Thursday’s report showed new-home starts revised down to 1.161 million in July, compared with an initial estimate of 1.206 million.
(…) new applications for building permits, a bellwether for forthcoming construction, rose 3.5% to 1.17 million, from a revised July rate of 1.13 million. Permits for single-family homes rose to 699,000, the highest since Jan. 2008.
Regionally, higher levels of multifamily starts in June and July were due to developers rushing to begin construction in New York before the expiration of an affordable housing tax credit but the Midwest is clearly suffering from low commodity prices while starts in the West peaked in June (table from Haver Analytics).
New-home prices rose in 35 cities, compared with 31 in July, the National Bureau of Statistics said Friday. Prices dropped in 25 cities, fewer than the 29 in July, and were unchanged in 10. (…)
The average price of the 70 cities rose 0.17 percent in August from July, gaining for a fourth consecutive month, according to Bloomberg calculations based on official data. (…)
Existing-home prices rose last month in 43 cities from the previous month, compared with 39 in July. They dropped in 16 cities and were unchanged in 11. (…)
Nationwide, unsold new homes rose 16 percent from a year earlier to 428.6 million square meters (4.6 billion square feet) as of Aug. 31, the statistics bureau said Sunday.
Improving sales haven’t translated into a revival of real estate investments, which expanded 3.5 percent in the first eight months, the slowest pace since 2000, according to Sunday’s data. (…) 
The structural problem of oversupply may have been eased slightly with better sales and lower housing starts, but is still far from resolved and high inventory pressures persist. We continue to expect weaker property investment growth. (Nomura)
Defaults Mount in Beleaguered Energy Industry Energy industry experts say more oil-and-gas companies are poised to follow Samson Resources into bankruptcy as oil prices remain low following a steep drop that began last year.
The default rate among U.S. energy companies has accelerated in recent months to 4.8%, the highest level since 1999 and up from 3.3% in August, according to Fitch Ratings.
Within that group, exploration and production companies like Samson are defaulting at an even higher rate, 8.5%, Fitch said. Default volume for such companies is the highest it has been in five years, at $10.4 billion in debt.
The broader U.S. corporate default rate is 2.9%, according to Fitch.
Meanwhile, the yield on a basket of U.S. junk-rated energy bonds has risen to 11%, just off its highest level since July 2009 and up from 5.9% a year ago, according to Barclays PLC. (…)
More defaults may occur after October, when banks are expected to reduce the amount of credit they provide to these companies.
And early in 2016 when hedges fade out.
Banks Warn of Cost Cuts Ahead Fed’s move to keep interest rates near zero could continue to crimp revenue
(…) Now that the Fed decided to stand pat, some lenders are warning they could have to cut expenses further to compensate for the revenue that would have come in if rates had ticked upward.
Rising interest rates are generally good for banks, because they typically accompany strong economic growth and because they tend to widen the spread between the interest banks charge on loans and what they pay for deposits. That bolsters earnings. (…)
Investors sold off bank shares after the Fed announcement. The KBW Nasdaq Bank Index fell 2.3%, a much deeper drop than the 0.4% decline in the Dow Jones Industrial Average. Some bank stocks fell even more, with Citizens Financial Group Inc. dropping 3.4%, Fifth Third Bancorp falling 3.5% and Zions Bancorp pulling back 3.4%. (…)
So desperate for job security are young Indians that 2.32m people, including some with PhDs and thousands of graduates and postgraduates, applied this month for 368 humble civil service posts advertised by the Uttar Pradesh state government, officials said on Friday.
The Uttar Pradesh government said it wanted the peons for the state assembly in Lucknow to be able to ride a bicycle and have at least five years of school education, but among the applicants were 255 with doctorates in subjects such as engineering as well as 25,000 with master’s degrees. Salaries start at about Rs16,000 ($240) per month.
The deluge of applications — which bureaucrats said would take up to four years to process even if they interviewed 2,000 a day — is the latest confirmation that tens of millions of young men and women are jobless or underemployed in the swath of poor and densely populated states of north India despite an official national unemployment rate of less than 5 per cent. (…)
Asked about the millions of applications for jobs as night-guards or office “peons” — the helpers who clean up and bring tea to bureaucrats — Surjit Bhalla, chairman of Oxus Investments, said: “Everything you know is wrong with India is personified in that statistic . . . both our labour laws and the fact that in a government job you do nothing and get paid a nice, healthy, fat wage. You can’t be fired. You’re there forever.” (…)
Indian job ad receives 2.3m applicants