After months and months of build-up over the potential for a September rate hike by the Federal Reserve, the central bank's message to the markets about what it will decide is less clear than it's ever been. There are at least three common-sense factors that are to blame for the ambiguity:
1) the fact that not every member of the 10-person FOMC is obligated to agree with the others, meaning there will always be room for dissenters from the consensus;
2) the lack of a consensus from the committee to begin with;
and 3) the confusing mix of encouraging and discouraging economic data, especially overseas.
A brief look at the most commonly cited "pros" and "cons" relating to a rate hike might be helpful. The outlook has become more and more cloudy as time has gone on if only because the markets tend to seize upon only the most immediate evidence or news in formulating their collective expectation for when the first rate hike will come (as well as their collective opinion of whether that will be a good or bad thing).
Nonfarm payrolls came out on Friday morning to the disappointing tune of 173,000 new jobs added during the month of August. Market participants generally view payrolls numbers that aren't near or above 200,000 as soft. Although this did follow two consecutive months of stronger growth (that were even revised upward after the fact), the August jobs report was seen as a crucial gauge for the Fed to use in weighing the benefits and risks of embarking on the path toward normalizing monetary policy this month.
Despite weaker job growth, the U3 unemployment rate fell to 5.1%, the lowest level in nearly 7-and-1/2 years. Workers' average hourly compensation did actually rise, a glimmer of hope that wage growth may finally be on the rise after many months of stagnation.
Divergent Fates on Rate Hike?
Meanwhile, on the global markets, things are still less encouraging than in the States. In addition to a mounting refugee crisis in Europe, the Eurozone is continuing to struggle with deflation. The euro has slid from nearly touching $1.16 around the end of August to just above $1.11 against the dollar today. European shares tumbled around 2% into the red in early trading on Friday.
Japan similarly has a two-pronged problem on its hands: even more acutely than the rest of the Western markets that have followed China's downward spiral, nearby Japan has been dragged lower by the market correction on mainland Asia. Foreign investment has been fleeing from Japanese stocks, as the Nikkei 225 extended its recent losses by falling another 2.15% on Friday. The yen did firm up, however, surging to better than 119¥ per dollar.
Even with the other largest economies in the world (the EU, China, and Japan) in seemingly perpetual turmoil since the summer, economic conditions seem to be relatively stable in the U.S. The yield on 10-year Treasuries was steady around 2.14% to close out the week.
Fed Against the World
Though a considerable portion of market sentiment swung toward the Fed surely delaying the first increase to its benchmark interest rate after China's equities market melted down and plunged the world markets into disarray, the members of the FOMC have stuck to the case being strong for moving rates in September. This has been especially true now that the worst seems to be over. Richmond Fed President Jeffrey Lacker expressed to the media on Friday that his outlook on the rate increase remains unchanged. Many of his colleagues share such resilient opinions—Fed governor Stanley Fischer has even said that it will be "too late" for the Fed to move if inflation begins to pick up (which it hasn't as of yet).
There is some belief on the markets that the Fed could act in September to save face, only to keep rates the same until much later into 2016.
Nonetheless, you'd be hard-pressed to find a world leader who sees the September rate hike from the Federal Reserve as a good thing. It serves none of their interests to see the U.S. tighten policy while the rest of the world continues to rely upon monetary stimulus. G-20 leaders have voiced their concerns over the potential risks to the global economy if the Fed acts too soon, but this is unlikely to sway the central bank absent some enormous unforeseen catastrophe.