Fed has faith in the Phillips curve – Danske Bank

With the rate hike in June, the Fed sent a clear signal to us that it is not as data dependent as it claims to be, and is biased towards a normalisation of rates, explains the analysis team at Danske Bank.

Key Quotes

“At least the Fed is focused more on the unemployment rate than wage growth, inflation and inflation expectations which are all low. The reason is Fed Chair Yellen’s faith in the Phillips curve, as during the press conference she repeatedly said that the tighter labour market should be sufficient to push wage growth and inflation higher eventually. The problem is that tightness of the labour market is not the only factor determining wage growth, as second-round effects from the many years with low inflation have hit wage growth. When employees expect inflation to remain low, they can live with low wage growth, as real wage growth may still be solid.”

“We expect the Fed to hike one more time this year in December due to the focus on the unemployment rate and easy financial conditions. By skipping September, the Fed can get some more clarification about whether the low inflation prints in recent months were temporary or not. Instead, we expect the Fed to make an announcement on the balance sheet in September.”