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A viewpoint on the Federal Reserve FOMC minutes

26 June, 2014

By Jameel Ahmad, Chief Market Analyst, FXTM
The currency markets have been slightly quieter than usual this week. Although this could possibly be attributed towards the emerging geographical tensions in the Middle East, it is likely correlated by investors deliberating over a more dovish than expected Federal Reserve FOMC minutes release last Wednesday evening.
The US central bank surprised many by downgrading their economic growth forecasts for 2014. The Federal Reserve admitted that the adverse winter weather conditions the United States encountered over the New Year period had a larger detrimental impact on their economy, than they first envisaged. Subsequently, the US Federal Reserve are now expecting the US economy to expand between 2.1% and 2.3% this year. This is a considerable decline from the 2.8% to 3% forecasted only three months ago.
Although the central bank announced that US economic activity had rebounded in recent months, Federal Reserve Chair Janet Yellen refused to offer a time frame regarding when the Federal Reserve would consider raising interest rates. Previously, Yellen had hinted that the Federal Reserve could raise interest rates around six months after the conclusion of their quantitative easing program.
Yellen appeared far more dovish than I was expecting during her live press conference address. Although we have become accustomed to a dovish Yellen tone from time to time, I was still surprised at the lack of hawkishness from the Federal Reserve leader. For example, Yellen signaled an overall dissatisfaction with the current state of the US employment sector. This is one area of the US economy which has made substantial progress as of late. For the past four consecutive months, the US economy has added over 200,000 jobs to their payroll. This is something that has not been achieved for nearly 15 years. Additionally, June’s Non-Farm Payroll (the amount of jobs the US economy adds in a month) confirmed that the United States has now regained all of the 8.7 million jobs lost during the recession.
There are also strong indications that the US employment sector is set to carry on progressing. US Small Business Optimism is now at its highest level since September 2007 and US manufacturing (supports 17 million US jobs) is expanding at its fastest rate in four years. Furthermore, Initial Jobless Claims (the number of unemployed benefits filled every week) are now at their lowest four-week range since the global financial crisis materialized.
Interestingly, Yellen did indicate an advancement in household spending and this is one area I envisaged she might refrain from praising. Consumer expenditure is a crucial component of the US economy (reportedly 70% of US Gross Domestic Product) but the past two consecutive Advance Retail Sales releases have failed to meet expectations. Similarly, US housing data is lacking consistency. We are encountering an improvement in consumer confidence readings (Tuesday’s US consumer confidence release reached a six-year high) but I feel we are yet to see this transition into tangible consumer expenditure.
Other analysts have also been commenting on the reduced spending levels and the general consensus is that it could be linked to US average wage growth. Despite the US employment sector making progress, last month’s average wage growth (annualized) was around 2.1%. It has been suggested that in order for the US economy to start witnessing elevated consumer expenditure levels, average wage growth needs to be increasing by at least 3%.
Moving forward, it is imperative that the US economy continues to add jobs to their payroll. The US employment sector is now growing at a pace not seen since 1999; and though I might feel that we are still not noticing much progress in regards to consumer expenditure, as long as the US economy continues to add jobs, this should rectify itself.

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