Fed rate hike expectations: Cheap oil and strong dollar blot outlook for Federal Reserve interest rates decision

Chris Papadopoullos
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Fed chair Yellen faces a tough call tomorrow (Source: Getty)
Clouds are gathering over the US economy as the release of bearish data spooks investors ahead of tomorrow’s highly anticipated Federal Reserve interest rate decision.
Manufacturing output contracted by 0.5 per cent in August, according to Federal Reserve data released yesterday – the sector’s biggest output decline since January 2014. Industrial production, which includes mining and utilities as well as manufacturing, fell by 0.4 per cent.
“These data are undeniably very soft, because manufacturing has been hit by a one-two punch from the plunge in oil firms’ investment and, more recently, the surging dollar,” said economist Ian Shepherdson from Pantheon Macroeconomics.
The strong dollar has made US goods and services less attractive in foreign markets. But he added:
“These two factors are boosting the services sector, which is about seven times bigger than manufacturing.”
The weakness in August’s production was compounded by a weak survey of manufacturers in New York State this month. The Empire State index edged up to a score of minus 14.7 from August’s minus 14.9, suggesting factories in the region are still seeing business contract after a shock drop in the survey to below zero last month.
The strong dollar and cheap oil have also weighed on retail sales. Sales grew 0.2 per cent last month compared with July, but growth has been subdued this year compared with last year.
However, spending is not low because consumers are buying fewer goods and services, but because the prices of goods and services have fallen. Deutsche Bank economists said the US central bank should hike rates.
“US inflation is being held down only temporarily by the strong dollar and the downshift in commodity prices,” they said yesterday.
They also played down any threat from slower growth in developing countries, after their fragility was underscored by a mammoth sell-off in China that fuelled global stock market volatility.
“While some emerging market economies may be vulnerable, global growth prospects, in our view, have not weakened enough to significantly affect US economic prospects.”

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