Missed CPI Target May Push Rate Hike

Market Trends - 19/08/2015

As the Federal Reserve Open Market Committee’s meeting minutes are quickly approaching release, another relevant report published today show that the outlook for a September interest rate hike in the US is far from concrete just yet. The core Consumer Price Index report showed that a month-over-month target of 0.20% inflation was missed by 0.10%. While not a terrible tragedy, the dollar was adversely affected in the wake of the news, with a rapid recovery and continued ascent following. The disinflation witnessed was most likely a result of weak prices in the energy market, but despite these outside influences a change in policy to prop up inflation to the levels seen in other major economies is doubtful. Fresh in the minds of the policymakers in areas like the UK are ripple effects in their respective economies from the recent Yuan devaluation. It is difficult to speculate on the perspective of the Federal Reserve on this matter until the minutes are released, but for now it is not unreasonable to think that the US will not be the first major economy to raise rates.


Helping to advance this slightly positive growth in consumer core prices, though they are the slowest since 2014, are the bloated household energy and rent prices observed in the US recently. What may serve to balance the equation is a surge in consumer spending. Among other difficulties, Obamacare and its tendency to sap the finances of middle America make a recovery in consumption dubious. In sensitive circumstances like these, a statement from the FOMC mentioning the future interest rate hike will affect the dollar one way or another. If their statements reflect hesitancy to raise rates in September due to the global economic environment, expect the dollar to reverse momentum and lose some of the ground it’s gained of late. If Fed members are seen to be confident in the targeted rate hike, there is potential for the dollar to soar and gold to crumble. The CPI numbers hinting at the former have little in the way of an effect compared to statements coming later in the day.

 

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