Fed’s solid growth view for US faces test amid Greek change

By: | Published: February 2, 2015 1:08 AM

The Federal Reserve’s upgraded view that growth in the world's biggest economy is “solid”...

The Federal Reserve’s upgraded view that growth in the world’s biggest economy is “solid”, and so capable of withstanding an interest rate rise this year, will be put to the test by US jobs data this week.

Ructions over Greece’s new anti-austerity government will also continue to grip markets, and could overshadow economic data in the coming days.

The Federal Reserve last week lifted its assessment of the US expansion to “solid” from “moderate”, with jobs growth now seen as “strong”.

A Reuters poll forecasts that US employment data on Friday will show about 230,000 jobs were created in January, slowing slightly from 252,000 in December but still robust.

If confirmed it would be 12th consecutive month of payroll increases above 200,000, the longest such stretch since a 13-month run in 1994-95.

“Interest rates then were 6%. It simply isn’t a zero percent environment at the moment,” said Harm Bandholz, chief US economist at UniCredit.
Weak wage growth has dented some of the optimism created by strong job creation.

Average wages fell 0.2% in December, the biggest decline in at least eight years, although some economists said that may have been a seasonal fluke, and the consensus is for a 0.3% increase in January.

In an encouraging sign, the more widely respected Employment Cost Index, released on Friday, showed labour costs increased by 2.2% in the 12 months through December, although still below the 3% economists say is needed to bring inflation close to the Fed’s 2% target.

Fed officials have indicated that interest rates could rise as soon as in June, though futures contracts indicate investors expect a first move in September. The target rate has been close to zero since late 2008.

Fed Chair Janet Yellen has repeatedly said the decision will be data-dependent. US economic growth cooled in the fourth quarter of last year but consumer sentiment hit an 11-year high, data showed on Friday.

Greek wrestling

In an addition to its post-meeting statement last week, the Fed said its assessment of interest rates would also@ take into account “international developments”.

Bernd Weidensteiner, US economy specialist at Commerzbank, said non-US events would not change the general course of US monetary policy but could affect the timing.

“The US is still a relatively closed economy. The economic cycle is made in America,” he said. “But if, say, something awful happened with Greece, it would affect US markets.”

For the struggling euro zone, December retail sales and Markit’s final purchasing managers’ surveys (PMIs) will give the latest indications on the economy. However, with Greece’s new left-wing government flatly rejecting on Friday the expected extension of its bailout programme, and Germany saying fresh Greek aid was not on the agenda, economic news may take second place to politics as Greek Prime Minister Alexis Tsipras visits other European leaders.

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