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Is the Fed really going to raise rates after this

Wages are stuck at 2.5% y/y. If the Fed is truly data-dependent, this data should hold them back from raising rates. And not only the wages are poor, also job gains slowed down: only 138K jobs gained and a significant downwards revision worth a whopping 66K.

If they do hike, they are basically trapped in their own setting of expectations.  If they are indeed trapped, their only escape route is to make it a “dovish hike” – raising rates now but signaling a pause  for the remainder of the year.

Other figures are not that supportive of a rate hike:

  • Q1 growth was only 1.2% annualized. It is not only Q1, growth in 2016 was  a paltry 1.6%. This is below the new normal of 2-2.5%.
  • Inflation is dropping:  The Fed’s favorite inflation figure is getting further away from the holy grail of 2%, with only 1.5%. It goes hand in hand with the official core CPI that lost the 2% mark earlier.
  • Retail sales remain mediocre: the US consumer is not really on a shopping spree.

Data dependent or markets dependent?

The Federal Reserve raised rates in March, three months after the December move. The previous hike was in December 2015. The FED accelerated its tightening cycle, so things must be improving, right?

No. They did not change the outlook. It seemed like an opportunistic move to raise rates while stock markets were calm. So, they were bringing it forward rather than accelerating the whole cycle.

Are they doing it once again?

USD falls anyway

The dollar  is selling off in any case: EUR/USD reached new highs at 1.1282 and counting. Other currencies, including the election-troubled pound and the oil-wary  loonie, are also partying against the greenback.

US Treasury  yields are on the downfall, breaking various moving averages and flirting with the lows of the year. Markets do not believe the US economy is really growing, and certainly not justifying a  tightening cycle.


Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.