September FOMC hike still expected, but risks are higher

Data is consistent with the beginning of policy normalization in September. Data on US activity received since the July meeting have been quite positive on balance and should push the FOMC toward near-term lift-off. This is especially true for labor market developments. 

The committee should feel confident that inflation has rebounded off its lows and will gradually return to 2%. The recent decline in commodity prices pushes back the date at which headline is expected to return to 2%, but once the shock works its way through, inflation still returns to normal. 

"Further, core CPI inflation still moves above 2% y/y by December, giving us comfort that overall inflation will recover as we forecast by mid-2016. Should the committee defer the start of the hiking cycle past September, it will likely do so based, in part, on observed wage and inflation data, as well as concerns that the recent decline in oil prices and the resultant sustained low level of headline inflation could begin to feed into inflation expectations", says Barclays.

To an extent, the committee has once again shifted the goalposts slightly. After several meetings with the focus squarely on labor market slack, the shift to inflation as the predominant criterion for lift-off comes as a bit of a surprise. 

"September lift-off is expected. However, the bar is seen for the rate hike as having been pushed a bit higher. The higher bar, combined with lower energy prices and a modest deterioration in the international outlook since the July FOMC, has raised risks over our retained September call", added Barclays.