Fed to dominate week of central bank meetings

Sun Sep 13, 2015 5:19am 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 percent 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 10th straight monthly drop, along with an annual factory gate price deflation of almost 6 percent, does not help rate hike arguments.

Data on Sunday showed growth in China's investment and factory output missed forecasts in August, raising the chances that third-quarter economic growth will dip below 7 percent for the first time since the global crisis.   Continued...

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