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 Guessing whether the Fed hikes rates on Thursday or opts for a later
date, perhaps December, is something of a futile exercise because
even the rate setters appear to be wavering and the decision will
probably come down to the wire.
An unexpected drop in the jobless rate to 5.1 percent and an upward
revision in second quarter growth to 3.7 support calls for a hike as
the labor market tightens and utilization is at its best level since
the global financial crisis.
Yet, futures only price a 24 percent chance of a hike as emerging
markets, particularly China, struggle, inflation remains benign and
some notable Fed watchers, like former Treasury Secretary Larry
Summers, argue against a hike.
"My best guess is that the committee is also confused about what the
right decision is, and as a result they are waiting to the last
minute with making a decision," Torsten Sloek, the chief
international economist at Deutsche Bank said.
"The cost of this approach is that market expectations become
unanchored but they may view this as a small cost relative to
sending strong signals ahead of a meeting where there seems to be
limited consensus among (rate setting) members," Sloek said.
China's slowdown is likely to be a key worry for the Fed and a 14
percent drop in Chinese imports over the past year, the tenth
straight monthly drop, along with an annual factory gate price
deflation of almost 6 percent, does not help rate hike arguments.
Fresh industrial output data, due in Beijing on Sunday, are expected
to show an uptick in growth to 6.4 percent in August from 6.0
percent a months earlier, partly a factor of lower commodity prices,
but the figure is still below trend as economic growth slows to its
lowest pace in decades.
Fears of a hard landing, the prospect of deflation and billions of
dollars spent on keeping the yuan steady raise the prospect of more
rate cuts and currency devaluation by Beijing, setting markets up
for more volatility.
In Europe, the key item will be September euro zone inflation data
due on Wednesday, likely supplying another arguments for the
European Central Bank to beef up quantitative easing.
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Price growth is seen holding steady at 0.2 percent, far off the
ECB's target of just under 2 percent and ECB President Mario Draghi
has already warned that the euro zone could dip back into deflation
on lower commodity prices and weaker growth from emerging markets.
The big inflation miss and a modification of quantitative easing are
just the latest in a long list of troubles for central banks around
the globe as developed nations struggle with weak growth and anemic
inflation.
"Are central bankers losing credibility? Preliminary results from
our survey show that 68 percent of investors believe so," RBS said
in a note to clients. "Yet, we are stuck in a world where central
bankers’ words will determine investment decisions, often beyond
fundamental reasoning."
The Bank of Japan announces its rate decision on Tuesday and
Governor Haruhiko Kuroda is expected to offer a bleaker view on
overseas economies and may lower its assessment on the country's
exports next week, sources told Reuters.
Yet the bank already said it was not considering cutting or
abandoning" the 0.1 percent interest its pays on excess reserves
financial institutions park with the central bank.
The Swiss National Bank is also expected to keep policy steady but
markets expect the bank to say that it was ready to cut the deposit
rate even further into negative territory if necessary.
(Additional reporting by David Chance in Washington Editing by
Jeremy Gaunt)
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