Mixed Economic Data Puts the Fed in a Bind

Retail sales grew 0.6% in July in a broad-based gain, with 11 of 13 major categories advancing. While spending bounced backed from a disappointing June, the economic picture in the U.S. remains mixed. Inflation is low, with core PCE running at 1.3%, well below the Federal Reserve’s 2% target, and China’s move to devalue its currency has put upward pressure on the U.S. dollar, which could have negative consequences for U.S. companies. Federal Reserve Chair Janet Yellen will be in a tough position when the FOMC reconvenes in September. The recent global volatility combined with a low inflation environment gives “doves” room to question tightening next month. Whether or not the first interest rate hike comes in September, it’s important to remember that the Fed only controls the front end of the curve. The long end is driven by inflation and economic growth, both of which we expect to remain moderate in the months ahead.

Sources: Bloomberg, NY Times