Americans are likely to know their new president and how their Thanksgiving turkey tastes before they get an interest-rate increase.
A combination of less-than-reassuring data and political risk at home and abroad will stay the Federal Reserve’s hand, forcing it to wait far longer than it had planned and advertised before adding a single 25-basis-point rate increase to a tightening campaign it began last December.
Fed Chairwoman Janet Yellen fully earned her scouting badge for central banking speechmaking last week, managing to be vague, reassuring and noncommittal in more or less equal measure.
It was perhaps what she didn’t say that was most telling, ratcheting down her rhetoric about the timing of any increase in rates.
“Yellen expresses optimism throughout the speech, but she doesn’t repeat her guidance from less than two weeks ago that a rate hike would be forthcoming ‘in coming months,’ ” Steve Englander, currency strategist at Citigroup, wrote in a note to clients.
“There is no timetable, and the pluses are very vague. Unless the sky is falling in, there is no way that she can express pessimism — would be self-defeating — so you take it as a given that she will sound optimistic on hitting targets in long term. The vagueness on the timing of hikes is what is striking.”
Yellen was speaking days after U.S. employment data showed a sharp reduction in new jobs created in May, taking the three-month average of payroll gains to 107,000, about half where it was as recently as February.
Yellen did a nice job sketching out the unknowns, including slowing Chinese growth and the fact that inflation expectations are slipping further away from the 2 percent the Fed is supposed to achieve as its target rate.
David Rosenberg, chief economist at Gluskin, Sheff Research, notes the decline in jobs in goods-producing sectors, which are shrinking at a 1.2 percent annual rate, which he says is similar to six other such falls over 50 years.
“Each one of these periods presaged a recession just a few months later — the average being five months,” Rosenberg wrote in a note to clients.
None of that is ordained, but clearly the Fed would need to see good evidence, in the form of better employment data, before it goes ahead and hikes.
A look at the financial markets shows traders attach about a one-in-four chance of a hike by July and less than a 50 percent chance in September. It is in November, before the presidential election, that the implied probabilities rise to 51 percent.
James Saft writes for Reuters.