Fed on track for September lift-off

After six years of near-zero interest rates, the Fed will soon raise rates for the first time in almost a decade. The central bank last lifted rates in June 2006.

The Fed has said it will raise rates when it sees further labour-market improvement and is "reasonably confident" inflation will rise back to its 2% target over time. Recently, Fed Chair Yellen affirmed that she thought it would be appropriate to start lifting rate at some point this year.

With wage growth picking up and core inflation firming, we believe it will be difficult for the Fed to wait until beyond September before starting to raise rates. As mentioned, by end-2015 headline CPI inflation close observed at 2% and the unemployment rate below the Fed's NAIRU estimate of 5.1%.

Core PCE inflation, currently at 1.2% y/y, is much weaker than core CPI inflation at 1.8% and well below the Fed's 2% longer-term target, says Nordea Bank. 

"However, the Fed at the moment will likely choose to put more weight on the firmer core CPI, because core PCE inflation is currently depressed by cuts to regulated prices on health care not paid by consumers. In any event, it will not be current inflation that triggers a Fed rate hike but rather the tightness of the labour market and its implications for future inflation risks", states Nordea Bank.