FOMC leans toward a move – Wells Fargo

Research Team at Wells Fargo Securities, suggests that last week’s FOMC statement indicated that “near-term risks to the economic outlook have diminished.”

Key Quotes

“In particular, the FOMC cited that “the labor market strengthened and economic activity has been expanding at a moderate pace.” We are cautious on the first statement and supportive on the second.

We appreciate the bounce back in job growth for June but suspect the pace of job gains has moderated over the past six months. Moreover, we estimate the sustainable pace of job gains over time is more consistent with 90-100,000 jobs and not the 200,000 plus gains over the past year.

Moreover, there is an issue with the combination of slower job gains and yet rising inflation over the medium-term. The FOMC’s two stated goals appear to be entering into a period of conflict. The degree of labor market slack has diminished significantly over the past year and now is at a level consistent with the combination of slower job gains and rising wages pressure.

Moderate Growth and a Hidden Risk

Our view is consistent with the FOMC’s on moderate growth. For the second half of 2016 and the first half of 2017, the limits of our confidence, we anticipate growth at 2 percent. However, the balance of growth is unbalanced. The growth is tilted toward the consumer/housing with weakness in business equipment, structures and net exports.

This is an issue. Although there are expressions that additional FOMC rate increases would not hit the economy hard, note that all three of the weaker sectors are interest rate sensitive—either directly or through a stronger dollar. We therefore are cautious that further FOMC moves would have so little impact as many assume.

About That Inflation

Our view, like that of the FOMC, remains in favor of moderate pick-up in inflation towards 2 percent. Our issue is that we do not see inflation hitting 2.0 percent until early/mid-2017 and that there is no continued acceleration of inflation above that level into the second half of 2017. This intimates that rate moves will be modest—and limited.”