by Calculated Risk on 9/04/2015 07:22:00 PM

Economist are uncertain whether the Fed will increase the Fed Funds rate in September ...

From Neil Irwin at the NY Times The Upshot: A Positive Jobs Report Keeps the Fed in a Tricky Spot

Nothing about the latest numbers is likely to tip the balance for the Fed one way or the other. The unemployment rate is now down to 5.1 percent, its lowest since April 2008, when the Great Recession was a mere toddler. The 173,000 payroll jobs added in August were a little below analyst expectations, but revisions to earlier months were positive. Average hourly earnings rose a healthy 0.3 percent.

From the WSJ: Blurry Job Picture Poses Test for Fed

Friday’s report, the last major gauge of job-market health before the Fed’s Sept. 16-17 meeting, leaves the central bank with a difficult decision as it ponders raising short-term interest rates this month for the first time since 2006: Has the U.S. economy improved enough to absorb higher rates, or does the fragile state of the world economy and the financial markets call for more patience?

The key sentence in the July FOMC statement was

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

Since that statement, the economy added 245 thousand jobs in July and 173 thousand jobs in August (and frequently August is revised up).  The unemployment rate declined from 5.3% in June to 5.1% in August.  My view is this is probably the "some further improvement" in the labor market that the FOMC mentioned in the July statement.

So the focus at the FOMC meeting will probably be on inflation.  Is the FOMC "reasonably confident that inflation will move back to its 2 percent objective over the medium term" (emphasis added).

Fed Vice Chairman Stanley Fischer said last week:

As I have discussed, given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further. While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade. The same is true for last year's sharp fall in oil prices, though the further declines we have seen this summer have yet to fully show through to the consumer level. And slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well.
emphasis added

Although inflation may be low over the next few months (lower oil prices), it sounds like Fischer is "reasonably confident" that inflation will move higher in the "medium term". So my guess right now (with less than two weeks until the meeting) is the FOMC will raise rates at the September meeting.

Note: It is a different question if the Fed "should" raise rates in September.  Clearly the risks are asymmetrical (hiking too soon poses much larger risks than waiting too long), and that argues for waiting a little longer.  Also I've argued for some time (based partly on demographics) that the unemployment rate could fall further without inflation picking up.