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Drop In US National Activity Index

James Boston
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Drop In US National Activity Index

The Federal Reserve Bank of Chicago has just published the June version of it’s National Activity Index. This index is showing a slight decrease in economic activity across the nation at a reading of 0.12, the expected number was 0.18 and the previous month’s reading came in at 0.18.

Despite today’s reading there has been clear pick up in the key US sentiment and activity indicators over the past few months, yet despite this there are many challenges remaining within the recovering economy. Federal Reserve Chair, Janet Yellen, outlined the key factors impeding smooth economic growth at her semi-annual Senate testimony last week. The focus of Yellen’s hesitations surrounding the US economic recovery is unemployment, inflation and the slow pace of financial reforms.

The slack in the employment market, particularly with respect to the lack of growth in wages, is currently causing the most concern to the Federal Reserve. The Hourly Earnings statistics are being closely monitored according to the Fed Chair’s congressional testimony. Although a formal link between employment and interest rates has been abandoned by the Fed, the existence of stagnant wages is being used as a justification for the maintenance of loose, or ‘accommodative’, monetary policy.

This makes it all but certain that the Federal Open Markets Committee (FOMC) will hold off an any interest rate action until closer to the second half of 2015. The previous timeline given by the Fed officials was for a rate hike to occur no sooner than 6 months after the conclusion of the Fed’s quantitative easing program. This program, it has now been stated, is targeted to finish up in October of this year, at which point the Federal Reserve will no longer conduct open market bond purchases. Conceivably, an October conclusion of the Asset Purchase program would enable a rate hike as early as the start of Q2 2015, this however will depend on positive changes within the employment market.

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