With the impact of the adverse weather conditions we saw in Q1 now well behind us, I think that members of the US Federal Reserve will be rather looking forward to this week’s meeting, and not simply because they won’t require a snow shovel to make it in.
Growth in Q2 has been less than perfect so far. Overall growth for the first half of the year will struggle to beat 1% on an annualised basis and therefore 2014 growth is expected to sit around the 2.2-2.5% mark. That will obviously depend on a strong second half of the year, and we believe that this Wednesday’s Fed meeting (at 2pm Eastern) will point towards that.
The question is one of focus and mandates. The Fed’s dual mandate system is based around maximum employment and stable prices; on both of these fronts the near-term news has been improving. 2014’s series of payrolls improvements have averaged 213,600 per month – the best five month average since February 2013 – while the unemployment rate has dipped to 6.3%, the lowest level since September 2008.
Combine that with the recent trend in initial jobless claims numbers that have seen the best 3 readings for 7 years come in the past 2 months, and you have a picture that will hearten monetary policy makers.
‘Unofficial data’ has also showed signs of encouragement. Readers of our updates will remember our positivity around last week’s National Federation of Independent Businesses’ survey, which showed that small business optimism had hit the highest level in over 6 years and that small businesses in the US are starting to see the labour market tighten. The survey’s expected employment sub-index rose to 10 from 8 which seems consistent with increasing payrolls on a monthly basis by around 225,000.
Add that to the reports of businesses finding it difficult to fill positions, and we have a sure fire sign of impending wage inflation as job applicants become more confident in bidding up wage settlements and employers more likely to do so to acquire the right talent. This leads to a growth in aggregate demand, output and eventually inflation which will promote a central bank desire for tighter monetary policy.
In the meantime, and alongside the Fed’s new economic forecasts due on Wednesday, we can anticipate that the expected pick-up in the employment market will improve. December’s forecasts had the unemployment rate at 6.3-6.6% at the end of Q2; the Fed can easily use recent trends as a reason to become a little bit optimistic around the prospects moving through the 2nd half of the year.
These comments will all be made clear in Janet Yellen’s press conference, following the universally expected decision to reduce, or ‘taper’, its asset purchases by $10bn this month, bringing the total to $35bn a month.