Fed Appears to Hold Line on Rate Plan

31 Aug 2015 | Author: | No comments yet »

Fed says rate hike next month hinges on market volatility.

Stanley Fischer said that 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.After a tumultuous week on the world’s stock markets, investors will be focused on Wall Street Monday ahead of another set of economic reports likely to steer the Federal Reserve’s decision on whether to raise interest rates for the first time in almost a decade.Stronger growth will pull inflation higher in the U.S. and Europe, according to three top central bankers who voiced confidence that their regions will escape from headwinds that are keeping inflation too low.Jackson Hole, Wyoming: The Federal Reserve on Friday left the door open to a September interest rate hike even while several US central bank officials acknowledged that turmoil in financial markets, if prolonged, could delay the first policy tightening in nearly a decade.

Federal Reserve Vice Chairman Stanley Fischer joined European Central Bank Vice President Vitor Constancio and Bank of England Governor Mark Carney Saturday on a panel at the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming, dedicated to discussing inflation dynamics. The influential US central banker was circumspect whether he would prefer to raise rates from near zero at a much-anticipated policy meeting from September 16 to 17.

In a speech on Saturday, Stanley Fischer, the vice-chair of the Fed’s Board of Governors, suggested inflationary pressures could soon lead to an increase. Markets will therefore be watching business surveys, factory orders and trade data from the world’s largest economy as well as the employment numbers due on Friday. “The week finishes with non-farm payrolls for August, typically the biggest market mover globally, and definitely on the Fed’s radar given unemployment is already close to full employment and the Fed looking to gauge whether there is ‘some’ further labour market improvement,” economists at National Australia Bank said. Hundreds of billions of dollars were wiped out and, mostly, gained back on stock markets across the world last week as traders and investors panicked about a possible slowdown in the Chinese economy, the world’s second-largest. US stock indexes ended largely unchanged, capping a week that included both the market’s worst day in four years and biggest two-day gain since the 2007-2009 financial crisis. At the same time, Fischer, Carney and other policymakers are wrestling with the world’s stubbornly low levels of inflation, and recognising that the rapid pace of globalization over the last quarter century may have made it harder for any individual country to move inflation higher. “There are profound secular and cyclical disinflationary forces at work in the global economy,” Carney said, making it harder for central banks in London, Washington and elsewhere to reach the inflation targets they have set as a core policy goal.

In New York, the Dow Jones industrial average index lost 1,000 points last Monday – a day dubbed Black Monday by Xinhua, China’s official news agency. Five-year, five-year inflation swaps in the euro area — which reflect expectations for the five-year path of inflation five years from now — show that market-based inflation expectations slid to about 1.65 percent in August from about 1.85 percent at the beginning of the month. The Fed has said it wants to be reasonably confident that inflation, which has been stuck below its 2-per cent target for a few years, will rebound in the medium term. Louis Fed President James Bullard told Reuters he still favoured hiking rates next month, though he added that his colleagues would be hesitant to do so if global markets continued to be volatile in mid-September. The Fed’s policy committee “does not like to move right in the middle of a global financial storm,” Bullard, a Fed hawk, said in an interview. “So one of the advantages we have is that this storm is occurring now and, at least as of now, we think it will be settled down” by the September meeting.

Still, “these movements can be hard to interpret, as at times they may reflect factors other than inflation expectations.” Fed Chair Janet Yellen and ECB President Mario Draghi both skipped the Jackson Hole event this year. Fischer said the dollar’s year-long rise played a big role in that weakness, and it could restrain US gross domestic product growth through 2016 and even into 2017 — all the more reason to ‘proceed cautiously’ in raising rates, he said. Almost half a year since the ECB started pumping €60bn a month of fresh cash into the economy, annual inflation data, due on Monday, will probably still show prices rose only 0.1% in August — nowhere near the bank’s 2% target ceiling. The US government reported this week that the economy grew at a 3.7 per cent annualised pace in the second quarter, sharply higher than its previous estimate, and that consumer spending, which accounts for more than two-thirds of economic activity, rose again in July.

Markets, on alert for any sign policymakers were ruling out a September liftoff, read Fischer’s remarks as suggesting a tightening would at least come this year. There is a growing chance the ECB will extend its stimulus programme beyond the planned completion in September 2016, and if inflation data misses expectations that likelihood will only increase.

Carney said a slowdown in China could depress UK inflation further but it did not, for now, change his central bank’s position on when and how it might raise rates. Atlanta Fed President Dennis Lockhart, a centrist who has become less resolute about a September rate hike as markets have tumbled, told Bloomberg TV that it was reasonable to see the odds of a move next month as roughly even. While the world’s major central banks are focused on bringing inflation up, the lack of price pressure isn’t a universal problem, said Raghuram Rajan, governor of the Reserve Bank of India. “Unlike our other panelists, I have the problem of dealing with the traditional central banker problem of high inflation and the task of bringing it down,” he said. “We’re disinflating in a world of very low global inflation and that has problems.”

One idea appearing to gain ground on Friday hinged on the Fed raising rates once or twice and then holding off until inflation started to rise to its 2 per cent target. The developments “are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert,” Carney told the conference, reiterating that the BoE’s policy decision would become clearer “around the turn of the year.” Before the meeting, Fischer had said it was too early to say whether the market turmoil had had an effect on the decision. “I think it’s early to tell: the change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is – more compelling, less compelling, et cetera,” he told CNBC. Last month, non-farm payrolls increased by 215,000 as a pickup in construction and manufacturing jobs offset further declines in the mining sector, and figures for previous months’ reports were revised up.

The Fed needs to rethink “full employment in a way that recognises the high joblessness of black and Latino communities,” Sarita Turner of PolicyLink told about 60 advocates, noting that US joblessness among blacks is twice that of whites.

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