A rate increase could come as early as September if economic data hold firm
Federal Reserve officials are looking more confidently toward an interest-rate increase before year-end, possibly as early as September, now that financial markets have stabilized after Britain’s vote to leave the European Union and the economy shows signs of picking up.
Officials are almost certain to leave rates unchanged when they meet July 26-27, according to their public comments and interviews with officials. But the message in their postmeeting policy statement could be that the economy is on a more solid footing than appeared to be the case when they last gathered in June, setting the stage for raising rates if the data hold up in the months ahead.
Such a message would get the attention of traders in futures markets, who see low chances for the Fed moving as early as September. In early June, traders on the Chicago Mercantile Exchange placed a probability of greater than 60% that the Fed would raise short-term rates by at least a quarter percentage point by its September policy meeting, according to the CME. The probability dropped sharply after a weak May jobs report and the June 23 Brexit vote and was just 12% on Monday.
Federal Reserve officials are widely expected to leave short-term interest rates unchanged at their meeting this week, following a dismal May jobs report. The Fed’s read on the economy and the risks it faces may shed light on whether officials are open to a rate increase in July or want to wait for more data. The central bank releases its latest policy statement and economic and interest-rate projections at 2 p.m. EDT Wednesday. Chairwoman Janet Yellen is scheduled to hold a news conference at 2:30 p.m. Here are five things to watch:
The Domestic Economy
Officials will likely modify their assessment of the employment outlook in their policy statement Wednesday, acknowledging the sharp hiring slowdown in May that Ms. Yellen dubbed “concerning” in her June 6 speech. Other labor-market data has been mixed: New jobless claims remain at historic lows, but the hiring rate slowed in April. On the other hand, the Fed could upgrade its assessment of economic growth amid signs of stronger demand.
The Brexit Vote
The June 23 British referendum on whether to leave the European Union “could have significant economic repercussions,” Ms. Yellen warned last week. With the vote a little more than a week away, and the latest polls showing growing support for a so-called Brexit, the chairwoman is certain to field questions during her postmeeting press conference about her view of the risks to the U.S. economy.
Investors around the world fled stocks and piled into havens Thursday as a cautious tone from the Federal Reserve, a resumption of the slide in bank shares and a fresh fall in oil prices fueled anxiety about the global economy.
The Dow Jones Industrial Average declined 250 points, or 1.6%, to 15665 shortly after the open. The S&P 500 dropped 1.5%, and the Nasdaq Composite slipped 1.3%.
As investors sought safety, U.S. government bonds, the yen and gold surged. The yield on the 10-year Treasury note dropped to 1.588% from 1.706% on Wednesday. The record closing low is 1.404% in July 2012. Gold futures gained 3.6% to $1237.90 an ounce, and the dollar fell 0.7% against the yen to ¥112.60.
U.S. crude oil declined 2.2% to $26.84.
The Stoxx Europe 600 fell 2.9%. Banking and mining shares dropped, while the U.K.’s FTSE 100 index was on track for its lowest close since 2012. Investors also shed stocks in Asia.
U.S. stock-futures trading volumes were high but haven’t yet surged to levels hit last summer. “We just haven’t seen the panic…’get me out at any price’ trading,” said John Brady, managing director at futures brokerage RJ O’Brien. “That says to us that we have further to go.”
Investors were nervous after Federal Reserve Chairwoman Janet Yellen on Wednesday highlighted risks to growth and inflation, but delivered a less dovish tone on interest rates than many investors had hoped for. Ultralow interest rates boosted asset prices for several years.
Federal Reserve officials expressed renewed worry about financial-market turbulence and slow economic growth abroad, leaving doubts about whether the central bank will raise interest rates as early as March.
The U.S. central bank lifted short-term interest rates by a quarter percentage point in December and penciled in four more increases this year.
But the policy statement, released Wednesday after a two-day meeting, raised questions about whether the Fed would follow through with a rate move when it gathers again on March 15-16. Futures markets place just a 25% probability on rate increase by then. The central bank sought to keep its options open while it assesses a potentially shifting economic landscape.
The plan to raise rates was built on officials’ expectations the economy would continue strengthening, but the statement suggested they now aren’t so sure: “The [Fed] is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”
That line caught the attention of investors and underscored the Fed’s newly uncertain tone. At their December meeting, officials expressed confidence the job market was improving and inflation would rise toward their 2% goal. Now officials are wondering whether they will need to revise down their projections for inflation, growth and hiring when next they meet.
An even-more striking statement of uncertainty is that the Fed wouldn’t offer an assessment about risks to the economic outlook. To guide markets, officials normally say whether risks to the outlook are balanced, or tilted toward economic strength or weakness. Officials abandoned any such assessment this time around.
“Fed loses its balance,” was the headline that J.P. Morgan Chase economist Michael Feroli sent out to clients after the meeting. He noted the Fed has rarely punted on its risk assessment. One time included September 2007, at the dawn of the 2007-2009 financial crisis; another in March 2003, when the U.S. was preparing to invade Iraq and oil prices were surging.
“I don’t think they’ve made up their mind about March,” said Gus Faucher, senior economist at PNC Financial Services Group. “They want to see how conditions play out over the next month and a half.…I don’t think it’s a done deal one way or another at this point.”
Stocks tumbled following the meeting, after being little-changed for the day to that point. The Dow Jones Industrial Average fell 222.77 points, or 1.38%, to 15944.46; it is now down 8.5% for the year. U.S. Treasury bond prices rose after the meeting, reversing earlier losses and sending their yields lower. The dollar was little changed.
In 2015, the American corporate landscape was dominated by activist investors, buybacks, currencies and deals.
This year, the question is whether U.S. businesses will shake off the weight of a strong dollar and lower commodity prices to expand profit growth, end their dependence on boosting returns with buybacks, and turn to investing in their operations.
The Federal Reserve had enough confidence in the economic recovery to raise interest rates in December, but it remains unclear whether global growth will be buoyant enough reverse weak business investment.
Many big companies are reining in spending. 3M Co. , with thousands of products from Scotch tape to smartphone materials, forecasts capital spending roughly unchanged from 2015. Telecom companies AT&T Inc. and Verizon Communications Inc. both plan to hold capital spending generally level in the coming year. Meanwhile, industrial giants like General Electric Co. and United Technologies Corp. are aggressively cutting costs and seeking to squeeze more savings from suppliers.
Capital expenditures by members of the S&P 500 index fell in the second and third quarters of 2015 from a year earlier, the first time since 2010 that the measure has fallen for two consecutive quarters, according to data from S&P Dow Jones Indices. Another measure of business spending on new equipment—orders for nondefense capital goods, excluding aircraft—was down 3.6% from a year earlier in the first 11 months of 2015, according to data from the U.S. Department of Commerce.
Businesses were handed a gift from Congress with the passage of tax breaks and a highway-spending plan that could trigger more spending. An L.L. Bean factory in Brunswick, Maine. Photo: Shiho Fukada/Bloomberg
More broadly, only 25% of small companies plan capital outlays in the next three to six months, according to a November survey of about 600 firms by the National Federation of Independent Business. That compares with an average of 29% and a high of 41% since the surveys began in 1974.
“Our guys are in maintenance mode,” said William Dunkelberg, chief economist for the trade group. “This recovery still stinks.”
Profit growth for the constituents of the S&P 500 index stalled in 2015 thanks to a combination of a strong dollar and falling prices for steel, crude oil and other commodities. Deutsche Bank estimates total net income for companies in the index fell 3% in 2015, while sales declined 4%. For 2016, Deutsche Bank forecasts net income growth of 4.3% and a 4% increase in revenue.
Some firms, including warehouse chain Costco Wholesale Corp. , supermarket Kroger Co. and Home Depot Inc., plan to increase spending. Helped by the tailwind of an improved housing market, Home Depot plans to invest $5 billion over three years to upgrade aging stores and improve technology to support online sales growth, while continuing to pay dividends and buyback shares.
William DeArment, chairman and chief executive of Channellock Inc., a maker of pliers based in Meadville, Pa., expects the family-owned company’s sales to rise 5% to 6% in 2016, partly because of product launches early in the year. The energy slump has hurt sales to that industry, but business with plumbers and do-it-yourselfers has been brisk lately.
“We’re looking for a pretty good year” in 2016, Mr. DeArment said. He worries, however, that the presidential election and the threat of terrorism could weigh on sentiment. “When people are afraid, they don’t expand their homes, they don’t buy cars,” he said.
Still, businesses were handed a gift from Congress with the passage of tax breaks and a highway-spending plan that could trigger more spending.
Wall Street is skeptical that the Federal Reserve has room to raise short-term interest rates Thursday, underscoring persistent doubts about the health of the global economy and financial markets following seven years of easy policy.
Some of the biggest names in the financial industry say a rate rise now would be unwise. And some executives whose firms would benefit from higher rates nevertheless don’t expect an increase Thursday. The view marks a sharp reversal from earlier this year, when a mid-2015 increase was widely expected.
“I wouldn’t do it,” Goldman Sachs Group Inc. Chief Executive Lloyd Blankfeinsaid Wednesday at a breakfast interview with The Wall Street Journal. He said wage growth has been anemic, a sign of labor-market slack, and inflation quiescent. Former Treasury Secretary Lawrence Summers and investor Warren Buffett have lately conveyed similar sentiments.
The central bank Thursday afternoon is expected to disclose its decision on the short-term benchmark interest rate at the conclusion of its two-day policy meeting. The Fed has kept rates near zero since December 2008 in a bid to hold down financing costs for consumers and businesses and bolster economic growth. It hasn’t raised rates since June 2006.
Some say doing so would risk a repeat of central-bank moves that have drawn criticism, such as the European Central Bank’s decision to raise interest rates in 2008, just before the acute stage of the financial crisis, and the Fed’s decision to tighten policy in 1937, a move some commentators say added years to the Depression.
Others warn of financial-market volatility that could spill over into the economy, setting back what has been an uneven recovery.
JACKSON HOLE, Wyo.—Federal Reserve officials emerged from a week of head-spinning financial turbulence largely sticking to their plan to raise U.S. interest rates before the end of the year.
During the Federal Reserve Bank of Kansas City’s annual economic symposium here, many policy makers signaled that stock-market volatility and China’s woes haven’t seriously dented their view that the U.S. job market is improving, and that domestic economic output is expanding at a steady, modest pace.
Inflation might remain low for longer thanks to falling oil prices and a strong dollar. Officials will continue to keep a close watch on markets and China. But they hope U.S. consumer-price inflation will start inching toward their 2% annual target as the economy’s untapped capacity gets used up, leaving them in position to start raising rates after several months of forewarning.
“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,” said Fed Vice Chairman Stanley Fischer in comments delivered to the conference, which ended Saturday.
The Fed has said it will raise rates when it is reasonably confident the inflation rate will rise again to 2%. Mr. Fischer’s comments suggested he believed the economy is closer to that point, although he pointedly avoided sending a signal about whether the Fed will act at its next meeting.
“I will not, and indeed cannot, tell you what decision the Fed will reach by Sept. 17,” Mr. Fischer said.
As the U.S. economic expansion ages and clouds gather overseas, policy makers worry about recession. Their concern isn’t that a downturn is imminent but whether they will have firepower to fight back when one does arrive.
Money has been Washington’s primary weapon in the decades since British economist John Maynard Keynes proposed aggressive government spending to battle the Great Depression. The U.S. generally injects cash into the economy through interest-rate cuts, tax cuts or ramped-up federal spending.
Those tools could be hard to employ when the next dip comes: Interest rates are near zero, and fiscal stimulus plans could be hampered by high levels of government debt and the prospect of growing budget deficits to cover entitlement spending on retired baby boomers.
Few economists believe the U.S. is near recession. The economy seems to have regained its footing after a first-quarter stumble, and Federal Reserve officials are considering whether to raise short-term interest rates for the first time in nearly a decade to ensure the economy doesn’t overheat.