Federal Reserve to Raise Rates in December? It's Complicated
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With your money briefing, I'm J.R. Whelan at The Wall Street Journal in New York. It would seem that with the U.S. economy pretty much clicking on all cylinders, interest rate increases by the Federal Reserve in September and December would virtually be a done deal. Well, it's actually not as cut and dry as you might think. We'll explain in a moment. First, these money in market stories you should know. Good news for workers who have seen bigger paychecks largely eaten up by price increases. The Consumer Price Index, which gauges what Americans pay for everything from rent to razor blades, rose a seasonally adjusted 0.2% in August from the prior month. But that was a smaller increase than economists had predicted.
A decline in the cost of apparel and medical care helped keep overall price growth modest in August. Another factor helping keep prices in check is a stronger dollar, which makes imported goods relatively more affordable. That's helping to offset price pressures that are tied to tariffs. And for years, airline miles have been among the most widespread perks for consumers who are seeking benefits from rewards programs. Well, now Wall Street Journal retail reporter Suzanne Kapner reports the retailers are also jumping further into the perks game. After years of competing for shoppers with just discounts, retailers are trying a new approach heading into the key holiday season. And that is wooing their biggest spenders with special services and access to private events.
Hotel chains and airlines, credit card companies and luxury retailers have for years offered their best customers special perks that go beyond points and discounts. But the vast majority of retailers are only just catching up. And that's one reason why retail loyalty programs rate so poorly among consumers. Apparel retailers rank second from the bottom out of 15 industry sectors and a recent study of more than 800 loyalty programs.
Most of Wall Street and the investment community agree that the Federal Reserve will raise interest rates later this month. But beyond that, that's where things get complicated. Wall Street Journal chief economics correspondent Nick Timros joins us from our Washington bureau to sort things out.
How does the current CPI report affect expectations for Fed rate hikes?
So Nick, the Fed is likely to keep its eye on trade disputes and current volatility in emerging markets when looking from September on to a potential rate increase in December.
The U.S. economy is doing very well right now. So If you were just looking at domestic conditions, that would be a reason to continue raising rates this year and certainly into the early part of next year. Where it gets more interesting is if you look at what's happening abroad right now. So far, you've had emerging market volatility that's really only fouled things up for two countries, Turkey and Argentina. And both of those countries have sort of idiosyncratic problems. One concern, though, is that these sorts of strong dollar emerging market volatility episodes tend to start in the places that have the idiosyncrasies, but they don't always end there. And so the Fed is going to keep a close eye on the possibility of emerging market contagion.
And related to that, you mentioned trade. Do trade disputes, especially with China, which has strong ties, of course, to a lot of emerging markets, Could all of that create a feedback loop that slows global growth, that hits the U.S. stock market, and that forces the Fed to reassess? That's the main wild card to the downside. But for right now, most Fed officials are so focused on the fact that the U.S. economy is doing so well that until the situation abroad gets a lot worse, it isn't going to really change their plans.
And a clue as to what the Fed's plans could be for December and next year could hinge on the presence or absence of the word accommodative in its statement. What's the significance of that word?
It's actually, the issue is that the word isn't all that significant anymore. So for years, the Fed has held rates below the level that they expect would prevail in a kind of a normal economy, an economy at equilibrium.
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