Latest Update On Fed Rate Hike Timing Projection

Here is a brief showdown on the most vital considerations for a 2015 Fed rate hike according to economic data by the end of the first quarter.

From last week's disappointing Nonfarm Payrolls to this week's Fed FOMC Meeting Minutes, there are a number of confusion regarding whether the Fed actually ready to hike rates in 2015 or not, and when they will (finally!) do it. Here is a brief showdown on the most vital considerations for a 2015 Fed rate hike according to economic data by the end of the first quarter.

1. US Job Market

US job market experienced a bit of falling out in the last winter and it showed most substantially in last week's Nonfarm Payrolls. Although analyst had expected March NFP to slow, the actual figures slipped far from expectation. NFP was up 126,000 in March 2015, as opposed to the expected 245,000. Furthermore, the figure was lowest record in more than a year. Following unsatisfactory ADP employment change and ISM Manufacturing PMI, it created concern on whether US economic recovery is taking a step back and Fed rate hike will be subsequently delayed.

US Job Market Data: (Above) Nonfarm Payrolls, (Left) Unemployment Rate, (Right) Average Hourly Earnings

However, as soon as the figures revealed, there are a number of analysts expected it to be mere seasonal influence and the Fed will see farther than that in considering their next monetary move. The sentiment was confirmed yesterday (8/4) as New York Federal Reserve President and FOMC 2015 voting member William Dudley mentioned that March NFP should not be alarming because the fast-paced NFP in the last few months were already higher than the tepid economic growth. In this regard, we should also note that the Fed latest economic projection pointed to unemployment rate of 4.8-5.3% in 2015 and 4.5-5.2% in 2016. With the latest unemployment recorded at 5.5%, US Job Market is already in the right track. It is further confirmed by the state of average hourly earnings that in the year-to-date have been largely positive albeit with some holes in between. Indeed, there are still many things that need to be improved as the projected targets are still unattained, but in the larger picture the figures are not bad at all.

2. US Inflation

Contrary to the-continually-rising-but-seasonally-challenged US job market, US inflation is visibly weakened. In January, the figure was -0.1% and only recovered to 0 in February. The main cause here is cheap oil. As a vital energy source that is used by almost all human activities, oil price hold an important place in a country's economy. For the United States, this is especially noteworthy because it is one of the world's biggest oil producers as well as consumers. Consequently, cheap oil brought out its own 'enemy', that is lay-offs and other challenges in the energy industry, and low inflation.

US Inflation Rate Data

In this circumstances, strong dollar does not help as it kept imported goods prices low. US Dollar appreciation which was a result of market anticipation toward Fed rate hike in a roundabout way ended up becoming one of the key reasons why the Fed may delay it instead. Moreover, rising dollar have cut US multinational companies' earnings. This is not a small matter. Indeed, the latest Fed FOMC meeting minutes particularly indicated that Fed members would prefer to hike rate later this year if cheap oil and strong dollar continues.

Fed official inflation projection expected inflation rate around 0.6-1.5% in 2015 and 1.6-2.4% in 2016 with core inflation projected at 1.2-1.6% in 2015 and between 1.5-2.4% in 2016. Those projected figures may be attained as inflations tended to slow in the first quarter and will probably pick up later. However, if oil prices does not quickly reached a new (and higher) stability and US Dollar appreciation continued, then even the longer run projection of 2% may be out of reach.

3. Fed FOMC 2015 Composition

Apart from data dependent, it should also be noted that rate hike will be decided by the Fed Federal Open Market Committee and thus is a subject of personal consideration as well. 2015 members of the FOMC are mostly dovish, as opposed to the 2014 one that included two famous hawks, Richard Fisher and Charles Plosser. Alas, the two are no longer a voting member. The latest entry of FOMC 2015 voting members are largely dovish and centrist, including: (dovish) Janet Yellen, William Dudley, Lael Brainard, Charles Evans, Stanley Fischer, Dennis Lockhart, Daniel Tarullo, and John Williams; as well as (centrist) Jeffrey Lacker and Jerome Powell.

The main difference between dovish and hawkish is their attitude toward rate hike. A dove will likely think twice if interest rate hike is potentially going to harm the country's job market, particularly new hires and wages growth. Meanwhile, a hawk is most likely going to promote rate hike, particularly if house prices are considered high and continually rising. It is not that doves unequivocally reject rate hike, it is just that the prerequisites that they consider necessary to be fulfilled before rate hike is relatively more varied and higher than hawks. While centrists are usually more objective and may help determine the end result in case of voting.

So, how do we measure the timing of Fed rate hike based on the Fed FOMC composition? Considering the latest speeches from Fed FOMC members and latest FOMC minutes, it seems that even the doves are rather convinced that US economy is moving to the right direction, and if it goes well till the next quarter then Fed rate hike in June is possible. However, if wages growth stalled, or inflation is still unsatisfactorily low due to cheap oil price and strong dollar, then we may see fed rate hike delay till later this year. What is relatively certain now is the Fed commitment to hike rates within 2015; but as to the exact timing, the guessing game is still underway.

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