Playing a role is the calendar, with the Fed not meeting until well into next month. As Lou Crandall at Wrightson Icap notes: “There is still plenty of time for events to undermine the case for a rate hike, as they have done repeatedly in recent quarters. It is much too early to say with confidence that the data will line up in favour of a rate hike on September 21.”
Longview Economics makes the point that two forces — growing wages via a tightening jobs market and accelerating credit and money supply growth — support higher US service sector inflation.
“The risks to the consensus view are therefore skewed to the upside, with the growing likelihood that the Fed is forced, at some stage, to once again begin talking up the prospect of rate hikes,” says Chris Watling at Longview.
Such talk, however, raises the prospect of a stronger dollar, and as we have often heard, Fed officials do worry about financial market turmoil stemming from a rejuvenated reserve currency tightening financial conditions.
At some point and perhaps sooner than the market thinks, US policy officials need to break this impasse. The longer the Fed stays on the sidelines, the more distorted markets become, storing up a much more painful outcome for investors.