Higher inflation expectations without earnings growth would make FED rethink rate hike

Every market participants and economists around the world will focus on Wednesday to view what is US Federal Reserve's stance, when it comes to hiking rates.

With US unemployment rate close to, what FED officials consider to be normal in line with dual mandate is making inflation the most important reaction function as FED decides to move ahead with rate hike.

• Even if market based inflation expectations struggling to rise, FED's preferred survey based measure is showing higher inflation expectations among public. According to survey by New York FED, one year ahead inflation expectation has reached 3%.

Will FED move ahead then?

• Though several measures of inflation has either remained stable or pointing at upward trajectory in future, FED's own survey of income expectation is lagging that of inflation expectations. Expectation on earnings growth has declined for consecutive second month to 2.3%.
  
  
• If rise in energy prices contribute to higher inflation worldwide, it is hardly the inflation FED is looking for. Moreover weaker wage rise in such scenario would push consumer away from spending. Gas inflation expectations have risen 5.8%.

FED is likely to remain cautious this Wednesday, while conveying policy message to everyone. Expected bias to remain dovish.