Global Daily – Caution the buzz word at the Fed

by: Nick Kounis , Aline Schuiling

Fed View: Doves on the ascendancy – Federal Reserve Governor Lael Brainard said earlier today that the FOMC should be cautious in raising interest rates further. She expressed concerns about inflation. In particular, she judged that ‘in today’s economy, there are reasons to worry that the Phillips curve will not prove very reliable in boosting inflation as resource utilization tightens’ and that the ‘underlying trend inflation may currently be lower’ even though the economy was on a solid footing. As such she asserted that the FOMC ‘should be cautious about tightening policy further until we are confident inflation is on track to achieve our target’. Clearly Ms. Brainard is one of the arch doves on the Committee but her mantra of caution is becoming prevalent among the other voting FOMC members. For instance, in their most recent speeches, four other FOMC members (Charles Evans, Neel Kashkari, Robert Kaplan and Jerome Powell) have talked about the need for caution and patience with further rate moves pointing at the low inflation outlook. The others (the powerful trio of Chair Janet Yellen, Stanley Fischer and William Dudley – and Patrick Harker) have stuck to the base case of another rate hike this year as they expect inflation to make progress towards the 2% goal. However, surely recent weak wage and inflation data would have shaken their conviction in that view. The chances of a prolonged Fed pause from its tightening cycle are rising. (Nick Kounis)

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Euro Macro: Weak retail sales no sign of economic slowdown – The volume of retail sales in the eurozone declined by 0.3% mom in July, following a 0.6% expansion in June. We do not think that the decline in sales is a sign of weakening economic growth moving into Q3. Indeed, we expect private consumption to continue to grow robustly in the second half of the year. It will continue to be supported by ongoing solid employment growth. We see job growth strengthening in the second half of the year on the back of the pick-up in GDP growth in the final quarter of 2016 and first half of 2017. On top of that, inflation is expected to remain moderate and more or less in line with wage growth. Finally, consumption growth should be stimulated by wealth effects stemming from the ongoing housing market recovery (house prices currently are rising at a rate of around 4% in the eurozone) and the low level of interest rates. Ongoing robust growth in consumption was also signalled by the fact that consumer confidence rose to its highest level in ten years in the past couple of months. (Aline Schuiling)