Not the time to change the rate: which the market is waiting for Janet Yellen

The fed on September 21, Wednesday, at the two-day meeting will announce decision about interest rates. The vast majority of market participants and analysts (in particular, 90% of the analysts surveyed by CNBC, 73.8% of the experts interviewed by the WSJ, and 85% of surveyed Financial Times) agree that the regulator will not raise rates.

The results of the meeting of the heads of the Federal reserve system will be known at 21:00 GMT. The fed will also publish new forecasts on the economy (at the September meeting provides a quarterly review of the monetary policy) and chair Janet Yellen will speak at a press conference.

Expectations of continued rate the market is showing a second consecutive month, despite the rather rigid attitude of the officials of the Department concerning the increase in recent times. In late August, fed Chairman Janet Yellen at the international financial conference in Jackson hole said that the regulator continues to consider a gradual increase in rates the correct measure to maintain level of employment and inflation at the target level and that the reasons for increasing increased (including positive statistics on the labor market, satisfactory inflation data and positive developments in the economy against the background of growth of household expenditure). At the same time, she stressed that the fed’s decision to raise rates continues to depend on incoming macroeconomic data.

Based on the August data, the US economy remains uncertain. As the WSJ wrote at the beginning of September, from the increase at the upcoming meeting of the fed can hold the latest data on unemployment. Its level in August does not change for the third consecutive month to 4.9%, or 0.1 p. p. below the expectations of analysts polled by Reuters. In August, US economy added 151 thousand new jobs — at 30 thousand below expectations (Bloomberg survey of analysts. The July data on the number of jobs was increased from 255 thousand to 275 thousand, and June, on the contrary, reduced from 292 thousand to 271 thousand FT As explained by a former employee of the fed, economist at Northern Trust by Carl Tannenbaum August data is quite good, but nevertheless they are not enough to convince fed officials of the need to raise rates in September.

To prevent the increase in can and sluggish industrial production data: the index of business activity in this sector fell from July’s 52.6 in October to 49.4%. Labor productivity in the second quarter fell for the third consecutive quarter by 0.6%. Decreased and the number of jobs in the manufacturing sector, 14 thousand As explained Michael Gapen from Barclays, “the U.S. manufacturing sector returned to stagnation after some improvement in recent months”. In his view, increased spending on wages and slowdown will cause a reduction in company profits. Inflation in August rose year-on-year to 1.1% in July, it amounted to 0.8%) is below the target value of the fed’s 2%.

Until the end of the year, the fed will hold two more meetings in November and December. Some fed officials, including the head of the Federal reserve Bank of Philadelphia Patrick Harker, spoke about the advisability of doubling before the end of 2016.

Member of the Board of governors of the Federal reserve Leil Brainard, in turn, on 12 September called for the fed not to raise interest rates too rapidly, while noting positive developments in the us economy. Her speech was the last before the so-called “week of silence” when the fed during the seven days before the meeting shall not comment on monetary policy.

Most market participants expect that the rate will be raised once in December.

The long-term prospects

One of the issues of the upcoming session, which attracted the most attention of economists, long — term plans of the fed regarding interest rates in the economy, which is experiencing the slowest growth of production, productivity and inflation over the past decade.

As expected, the Agency once again lowered the forecast on a “neutral interest rate”. This is the target value for the Federal funds providing the optimum level of economic growth and inflation. In 2007 — before the global financial crisis and the fed in an attempt to eliminate its effects began to dramatically lower the rate, the target value was 5.25 percent. Over the past four years the average forecast it was dropped several times: from 4.25 percent in June 2012 to 3.75% in June 2015 and 3% in June 2016. Among the key reasons for the lowering of low productivity, aging population, rising social inequality and a low appetite for risk among investors around the world. Reduced neutral means that the fed and other Central banks have less potential for impact on the economic situation.

According to Reuters, the conversations with fed officials suggest that at the forthcoming meeting of the Agency will worsen the long-term forecast of the neutral rate, whereas the average forecast will decrease to 2.75%. Thus, the fed will be forced to admit that the Outlook for the neutral was too optimistic for the fourth time in the last 15 months.

The reduced estimate to a target value would have a serious impact on monetary policy because it would indicate that the current policy is not so stimulate the economy as expected, wrote in August, former fed Chairman Ben Bernanke. A similar point of view was voiced in August, the President of the Federal reserve Bank (FRB) of new York William Dudley, who in an interview with Fox Business Network noted that the fed is “closer” to raising rates, but “at the moment, monetary policy is not especially stimulating”.

The expected reduction in long-term forecast to a target value means lower rates further increase and indicates that fewer increases in over a longer period than expected by fed officials and investors. That is, the worse the prognosis, the less the fed will have to worry about the tightening of monetary policy that could justify repeatedly postponed the decision on increasing.

According to the head of Federal reserve Bank of San Francisco John Williams, the hike may be “the most shallow in American history” or, as noted by the fed Bank of Dallas President Robert D. Kaplan, “much more moderate” than ever before. “As the neutral values you need to pass a shorter distance, the increase does not seem urgent even for those managers who are inclined to tighten monetary policy, wrote in August, Ben Bernanke.

The fed did not raise rates in 2016. In December last year the Ministry reported that it will increase in 2016, four times, but against the backdrop of slowing global economic growth, volatility, financial market and weak US inflation rate forecast was reduced to two promotions. In 2017 it is expected that the regulator will raise rates three times.