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FOMC: Faced with credibility and over reliance on data problems – ING

FXStreet (Delhi) – Rob Carnell Chief International Economist at ING, notes that the Fed is beginning to face a credibility problem and having tied itself in knots over its previous “forward guidance strategy”, now that the business cycle is older – arguably “late cycle”.

Key Quotes

“Only missing the usual rising wages and inflation that occur in a normal cycle – it is nonetheless seeing growth settling down to a slower pace of closer to 2.0% than the 2.5-3% that it experienced earlier.”

“Perhaps not surprisingly and, not helped by some softness in external markets and earlier dollar strength, the run of data has been mixed to soft, at least compared to expectations. This is problematic because even though the Fed has never tied itself to a date for the liftoff, it does look as if a number of members want to get things started this year, which given that this October meeting is effectively a write-off following the weak labour market report in September, means it is December or nothing until next year.”

“Normally, the Fed would be in a position to give some clues about its intentions. But the FOMC seems riven with dissent – we may see more than the usual one dissenter at the October meeting. And with no clear consensus, even a hint that December is looking a likely prospect for a hike will be hard to give.”

“Moreover, with every chance that the data is still running consistent with a late cycle economy, it is entirely possible that the data is still unsupportive for December, and any hint about a December hike could leave the Fed with egg on its face.”

“With no press conference, and little scope for the statement to provide any insights, and data not supporting the case for a hike, we don’t think this meeting will be very helpful for the hawks. Indeed, any acknowledgement of recent data softness could be interpreted as a dovish signal (although it is in fact just a reflection of what we already know). It is doubtful that the external assessment will have merited any change of statement text.”

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