The US growth rate appears to be stable enough at present to avoid an interest rate hike in November – and also possibly December. Consumer spending in the USA fell during August. This was the first drop for seven months. The Federal Reserve will consider this in its next two meetings when deciding whether to go with an interest rate hike or not.
Another negative aspect that makes a rate hike seem not as definite as we all thought is that inflation appears to be about to accelerate. According to the Commerce Dept. Friday, consumer spending fell 0.1% August after taking inflation into account. Consumer spending accounts for over 66% of U.S. economic activity. Consumers may have just taken a rest from spending in August but that cannot be the whole story.
It had been expected by most analysts, including Janet Yellen (Federal Reserve Chair,) that The Fed would hike the rates at least once to help maintain a stable economy. As expected, it is now very unlikely that a rate hike will be announced at the Fed’s November meeting. Odds on an interest rate increase in December’s meeting are now looking less that sure. It seems to be just 50-50 on a rate hike.
The effect of a rate hike is to help maintain a healthy rate of economic growth. However, the signs are now that the current rate of growth is sustainable without having to raising the interest rate. The inflation rate is slow and consumer spending and prices are not increasing fast.
In fact, consumer prices are stable, with the price index (excluding food and energy) increasing by just 0.2%. This was in line with personal income which also increased by 0.2% in August. Inflation was at 1.7% for the year to August and close to the Fed’s 2.0% inflation target.
Another factor is a tightening of the labor market. A potential increase in income may possibly lead to an increase in future spending which can lead to inflation. Excluding energy and food costs, inflation increased by 1.7% in the 12 months to August compared to 1.6% in the 12 months through July. The target for the Central Bank is 2.0%.
All in all the US growth rate is stable enough for the interest rate to stay as it is. Should there be a sudden upsurge in consumer spending in November, apart from seasonal spending, and should wages and prices begin to ramp up, then a rate hike is possible before the end of the year.
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