Mixed signals for next Fed meeting.

Just when every man and his dog (including us at bankchoice.com.au) were banking on a rate rise at the August 24 meeting of the US Federal Reserve, PPI (Producer Price Index) figures released last Friday cast doubt on that outcome.

The PPI measures cost increases in finished goods, and is an important indication of inflationary pressures feeding in the CPI (Consumer Price Index) which is due for release on Tuesday.

The PPI came in at an increase of 0.2% for July, but excluding food and energy was unchanged. Energy is a critical factor, with the price of oil jumping by almost 50% from last years lows, and 3.4% in July, offsetting the fall of almost 1% in food.

US Analysts, who seem adept at doing 180 degree turns, interpreted the PPI figure as a signal that inflation poses no threat, and that Alan Greenspan will sit on his hands at the FOMC meeting in August.

While it is good to see optimism at work, don’t count out a rate rise yet. Greenspan will be keen to make sure that the gate on inflation is both closed and bolted, and one set of figures by themselves will not convince him to change his mind.

However if the PPI figures are backed up by a lower than expected CPI number, along with other positive indicators, it will be yet another example of Greenspan’s extraordinary ability to talk the US economy up or down without having to resort to hitting the pedal itself too hard.

And the longer he can do that the longer we can expect stability on the local interest rate front.

Previous News ING Direct