Fed to dominate week of central bank meetings

Fri Sep 11, 2015 5:16am EDT
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By Balazs Koranyi

FRANKFURT (Reuters) - The U.S. Federal Reserve takes center stage in the coming week, eclipsing industry data from China, another grim inflation reading from the euro zone and rate decisions in Japan and Switzerland.

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.   Continued...

The Federal Reserve building in Washington September 1,  2015.   REUTERS/Kevin Lamarque