Slack in U.S labour market has been reduced substantially and is not far from being fully used up. Wage inflation is starting to pick up on certain measures and indicators of wage pressure, such as job openings and the quit rate, point to a continued rise in wage growth. Core inflation has moved higher lately, giving the Fed more confidence it will reach the 2% inflation target in the medium term. Overall uncertainty is not at an unusually high level, although there are risk factors such as Greece and emerging market growth.
However, the Fed would like confirmation that the weakness in Q1 was indeed due to temporary factors and that growth has bounced back to the 2.5% cruising speed as it expects. Danske Bank believe we will see this in the coming months and that it will pave the way for lift-off in September.
It is clear from recent Fed speeches that it wants to prepare the markets for lift-off this year, partly in an attempt to avoid too much market volatility. ' Probably what is most on the Fed's mind is to get as smooth a transition in markets as possible and avoid another taper tantrum.
