Fed hike hopes are dead-and-buried

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Weak retail sales are the final nail in the coffin

The important line in the US retail sales report is the 'control group'. It's the measures that strips out potential autos, gas and building supplies.

It fell 0.1% in August compared to a +0.4% reading expected. In addition, the July reading was revised down to -0.1% from 0.0%.

A slowdown in automotive sales was expected after poor numbers from dealers at the start of the month but the pain appeared to be more broadly based and that raises some concerns about the economy. Consumers have been a rock solid source of strength for US growth so far this year and Federal Reserve members have frequently forecast a continuation.

Drilling into the categories:

  • Sporting goods, hobbies, books and music stores -1.4% m/m
  • Furniture and home furnishings -0.7%
  • Electronics and appliances +0.1%
  • Food and beverages +0.3%
  • Clothing +0.7%
  • General merchandise stores 0.0%
  • Non-store retailers -0.3%
 

Kocherlakota: The Fed is about to make a mistake

Super Dove and ex-Fed president Narayana Kocherlakota writes for Bloomberg

  • Whatever the Fed does next week will probably be a mistake
  • The Fed should lower rates
  • After more than 7 years, inflation remains below target
  • Markets appear to be losing confidence that the Fed will ever reach its target
  • Fed is also falling short of its goal to reach maximum employment
  • Fraction of Americans in their prime working years remains well below pre-recession levels
  • All this argues for the FOMC to provide added stimulus by cutting interest rates by 25bps at Sep meeting
  • However, doing so now may require rates to rise more rapidly in the future, an outcome (for reasons unclear) they are determined to avoid

He's been peddling this line for quite sometime and has said on many occasions that any hike would be a mistake. He may be right on a lot of his points but he doesn't seem to take any of the recovery into account when making these comments. Should the Fed be raising now? That's open for discussion. Should they have raised rates based on how the economy has recovered from the bottom, I think so.

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