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Does the Fed have enough data to hike in September?

Janet Yellen said prospects are good for further improvement in the labor market and the economy, keeping the central bank on track for the interest-rate increase since 2006.

There is no longer question that the U.S. Federal Reserve will raise interest rates, but there is some uncertainty about how exactly many hikes are coming.

Market watchers are looking to the central bank’s September meeting because the time when the Fed will ultimately lift rates off the ground, particularly after Fed Chair Janet Yellen’s testimony last week.

The primary causes of the Fed’s unwillingness to raise rates happen to be the strong U.S. dollar, international risks and soft U.S. economic growth indicators at the end of 2014 and early 2015. First-quarter 2015 data particularly disappointed the Fed, as the pace of job gains didn’t look particularly sustainable when the economy hit a downturn.

But Scotiabank economist Derek Holt doesn’t actually think U.S. GDP shifted to a lower-growth trajectory at the start of 2015. He attributed the volatility to falling oil prices along with a rising greenback, along with temporary factors like a port strike and also the weather.

As a result, Holt expects the U.S. economy will show a healthy rebound into the middle of the year. He noted that by removing Q1, quarterly growth has averaged 3.6 per cent from Q2 2014 to the same quarter this season. In other words, four of the past five quarters happen to be pretty strong.

That leaves market watchers wondering when the Fed has enough data between now and it is September meeting to convince itself that economic growth has improved enough to warrant a rate hike.

It will have received Q2 GDP data and also the first revision to people figures by then, with the Atlanta Fed indicating growth will come in at 2.4 per cent. Holt expects time will move higher in the coming weeks.

The Fed go for a chance to take a look at two months of consumer spending figures for Q3, in addition to one month of business, trade and construction spending data.

“If the balance of those figures are positive and point both to some solid Q2 and a good start to Q3, that may suffice to convince the FOMC the economy indeed acquired after a soft Q1,” Holt said, adding this would also likely mean the central bank’s modest two-per-cent annual growth forecast for 2015 is probably going to be met.

Meanwhile, inflation remains contained by lower energy prices and weak imports because of the strong U.S. dollar.

There is still plenty of room to move toward full employment, however the economist noted that job gains in 2014 and the first half of 2015 imply that the Fed could justify a rate hike in line with the current labour market.

Holt noted that one of the biggest questions for that Fed during Q1 2015 was set up strong gains within the labour market during the preceding year could be justified on the basis of what could potentially have been weakening economic growth. “This problem could well be resolved through the September meeting,” he explained.