On first blush, the fact that the US economy has slowed from an annualised figure of 3.9% in Q2 to 1.5% in Q3 would seem to make it highly unlikely that the Federal Reserve might still raise interest rates in 2015, but this may not be so.
A key factor being blamed for the subdued Q3 growth is the decision of many businesses to reduce their inventories, selling off stocks on hand rather than placing new orders. If this analysis proves accurate, it is likely that demand will kick back up in Q4, potentially allowing the Fed to raise rates during its December meeting. On Wednesday, the Fed described the US economy as expanding at a “moderate” rate. Within the current data, consumer spending has slipped from 3.6% in Q2 to 3.2% this quarter, whilst this shows that the economy is slowing, it remains a healthy figure. Consumer spending has been supported by the continuingly “cheap” (everything is relative) price of crude oil which feeds into transportation and energy costs, meaning that consumers have a little more disposable income to spend.
Consumer price inflation was flat in September from a year before and is well below the Federal Reserve’s target level of 2%. An important factor in the low inflation number has been the price of crude oil and gas, of course, but generally weak demand around the globe has tended to stop prices from rising. Like most central banks, the Federal Reserve believes that a little low, constant inflation is good for the economy. Whilst a period of marked deflation could be harmful to the economy in that it could stymy demand as consumers wait for prices to fall, Western consumers are not renowned for the patience and want near instant gratification. After tax incomes, adjusted for inflation rose by 3.5% in the US.
