Federal Reserve officials will gather in Washington this week to decide whether to take the historic step of raising interest rates, finally beginning to reverse the unprecedented decision to lower them to zero in the financial crisis/r
The recent remarks of Fed officials suggest that the decision has not been made, even though it has been seven years in the making.
Instead, whether or not to raise rates and how quickly to tighten monetary policy are choices that will rest on recent economic data.
The unemployment rate has fallen from 10 percent in the depths of the crisis to 5.1 percent in August, a clear sign that the economy no longer is in a state of emergency.
Yet Chairwoman Janet Yellen and company have said that they are looking for confirmation that employment will continue to improve and that inflation, which they are mandated to keep steady, is going to rise to their 2 percent target. Recent storm clouds over foreign economies and swings in U.S. stock markets have given additional reason for caution.
Here are some of the numbers they will be looking at next week:
1.2 percent: Inflation, as gauged by the Fed’s preferred measure, which is the personal consumption expenditures index with energy and food prices stripped out.
Based on this index, inflation hasn’t hit the Fed’s 2 percent target in a long time, and it fell in the most recent reading. Some Fed members have argued that the central bank shouldn’t be tightening while it is falling short of the inflation goal.
“With headline and core inflation consistently below the Fed’s targeted level for over three years, monetary policymakers will have a hard time explaining to the public why they are raising interest rates,” Deutsche Bank economists wrote this week.
2.9 percent: Inflation expected over the next year by consumers, as measured by the University of Michigan consumer survey released Friday. That number hasn’t moved significantly in recent months, suggesting that inflation expectations are stable.
As long as consumer and business expectations of inflation are stable, the Fed is less likely to worry about inflation getting off track, whether by falling too low or rising out of control.
In addition to expectations being stable, there are signs that inflation has been rising recently. According to the Federal Reserve Bank of Dallas’ “Trimmed Mean PCE Inflation Rate,” over the past six months it has been at 2 percent, right at the Fed’s target.
85.7: The University of Michigan’s index of consumer sentiment, which plummeted to begin September down from 91.9 to the lowest level since September of last year.
The Fed is watching consumer feelings to get a sense of whether recent stock market volatility might turn into real problems for the economy, such as job losses.
Consumer sentiment is “where you might start to see maybe a little bit of an effect,” Federal Reserve Bank of New York President William Dudley said in late August during the market tumult. The huge drop in September might give him pause.
50 percent: The rough increase in the Chicago Board Options Exchange Volatility Index in the past month. Commonly known as the “fear gauge,” this indicator’s rise reflects the wild swings in the markets.
Big ups and downs could stay the Fed’s hand, Vice Chairman Stanley Fischer said at a monetary policy conference in Jackson Hole, Wyo., in late August.
“It does affect the timing of a decision you might want to make,” he said of turbulent markets, later adding that “we will know that they have settled down when they settle down.” So far, they haven’t.
16 percent: The rise in the value of the dollar against a basket of currencies, as measured by the Fed’s Trade Weighted U.S. Dollar Index.
Notes from the Fed’s most recent meeting in July suggest that the central bank is watching the value of the dollar closely. A “possible divergence in interest rates in the United States and abroad might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports,” minutes from the meeting read.
In plain English, that means that if the Fed tightens while central banks in Europe, Asia and elsewhere are trying to loosen money to stimulate weak economies, the dollar will rise. That, in turn, will make the cost of oil and imports to the U.S. relatively cheaper, lowering inflation. Right now, the Fed wants inflation increasing to its 2 percent target.
A stronger dollar also makes U.S. exports more expensive, hurting domestic manufacturers.
5.75 million: Job openings. There were 5.75 million job openings in July, the Labor Department reported. That was the most on record, and it wasn’t close. The previous high mark was 5.36 million, set in May.
Yellen has mentioned openings as a statistic she looks at for information beyond the unemployment rate. The fact that openings have skyrocketed by more than 20 percent this year should be an extremely positive signal.
