Fed Policy Continues to Guide Stocks, Currencies
Monetary policy goals at the Federal Reserve are accomplished when the financial environment supports maximum employment and stable prices. These central tasks require the bank to keep tabs on various factors in areas like the job market, macro monetary activity, and consumer price inflation. The latest policy announcement from the FOMC was released on July 27, and it shows an improved job market along with modest gains in monetary activity. Jobless claims, payroll figures, and other labor market data indicate a better employment scenario, while lenient institutional investment and accelerated growth in household expenditures suggest modest monetary activity in the economy as a whole.
The long-term objective of the Federal Reserve is to sustain inflationary pressures at a rate less than 2 percent. Declining crude oil prices along with decreases in non-energy imports have helped to keep price stability well below that 2 percent threshold. With this background, FOMC has adopted an accommodative policy, keeping the target federal reserve rate range to 0.25 percent to 0.5 percent. The accommodative stance will further improve job market and fuel inflation to near 2 percent.
Recent non-farm payroll data indicates an increase of 255,000 jobs for the month of July 2016, lower than previous months’ upward revision of 292,000 but above the consensus expectation of 180,000. In the past 3 months, the non-farm employment numbers have averaged 190,000 per month. Initial job claims have fallen to 258,600 in July, lower than the average of 267,250 in June (a reduction of 8,650). The job market data clearly indicate strength, making it easier for the Fed to consider interest rate adjustments. Overall, the stability of these numbers indicates an increased likelihood that we will see general improvements in average American net worth and gains in consumer spending into the final months of the year.
The Fed tends to operate on the assumption that moderate levels of price stability are necessary to drive consumption and bolster improvements in corporate earnings for businesses. Consumer inflation readings taken over the last six months have held steady near the 1 percent mark. This is well below the targeted inflation rate of 2 percent but does not fully suggest pressures large enough to prevent further interest rate increases.
GDP figures have been sluggish so far this year. For the quarter ending June 2016, the US economy grew at a rate of 1.1 percent, a small improvement on the 0.8 percent posted during the previous quarter. Stock markets were negatively impacted by the report as the market was expecting an increase of 1.2 percent.
GDP growth has been fueled largely by private consumption but has been restrained by institutional investment. These figures in conjunction with international factors like BREXIT and other geopolitical instabilities have gone far to dampen the general outlook. The accommodative policy currently seen at the Federal Reserve should continue to fuel strength in the job market and generate momentum in economic activity. Although recent labor market data provide room for upward rate adjustments, the inflation data, GDP figures, and international uncertainty will likely put pressure on the Fed to continue with the current federal rate range.