No Fed Hike If Oil Stays Below $50

 | Jul 30, 2015 01:29PM ET

We assert that it will be impossible for the Fed to raise rates this year if U.S. crude oil remains below $48.00 -- even if the next nonfarm payrolls come in between 200K and 300K. The October-March decline has already triggered a chain reaction of broadening cuts in capital and labor expenditure, which effectively cast a spell on the suppliers of these energy and mining companies. And barely when oil began its spring recovery, the declines emerged anew.

Fed hawks will ignore inflation and focus on unemployment, payrolls and wages. They will add that the non-accelerating inflation rate of unemployment aka equilibrium level of unemployment is at 5.3%-5.5%, matching the current unemployment rate of 5.3%.

Fed doves will point to the fact that inflation has remained below its 2.0% target for the last three years, while the true NAIRU stands a lower 5.0%.

h3 Jackson Hole All About Inflation/h3

Another FOMC statement and another swing at the law of probability. Some banks are considering the probability of a September Fed hike to be as high as 70%. Others prefer to hedge themselves with more appropriate qualitative means of referring to September as a “high probability outcome as long as….”, citing the two upcoming jobs reports (Initial Jobless Claims and Nonfarm Payrolls) and their average hourly earnings components. But even if the next two jobs reports are accompanied by robust hourly earnings, the inflation objective remains in doubt. We've long mentioned in previous pieces how the 20% decline in oil since early May will further retard any recovery in price growth, which has prompted the Fed to drop its phrase in the FOMC statement that “energy prices have stabilized”.