Fed Vice Chair Fischer keeps open possibility of Sept. hike

31 Aug 2015 | Author: | No comments yet »

Fed Vice Chair Fischer keeps open possibility of Sept. hike.

A week ago, it seemed almost certain: The Federal Reserve would raise its key short-term interest rate next month after holding it near zero for close to seven years.

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 US Federal Reserve will give serious consideration to raising its benchmark interest rate in the middle of next month, particularly if volatility subsides in financial markets, according to a number of Fed officials last Friday.WASHINGTON (AP) — Federal Reserve Vice Chairman Stanley Fischer left the door open Saturday for a Fed rate increase in September, saying the factors that have kept inflation below the central bank’s target level have likely begun to fade. Policy makers, over the past few months, had signaled as much as the US economy continued to grow steadily and the unemployment rate continued to fall.

The comments, uncoordinated but generally consistent, suggested that some investors and analysts had been too quick to discount a September rate increase, particularly as global markets finished last week on a relatively quiet note. “We haven’t made a decision yet, and I don’t think we should,” Fed vice-chairman Stanley Fischer said in an interview with CNBC. “We’ve got time to wait and see the incoming data and see what exactly is going on now in the economy.” The Fed’s policymaking committee is slated to meet on Sept 16 and 17. Fischer said there’s “good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.” He said, for example, that some effects of a stronger dollar and a plunge in oil prices — key factors in holding down inflation — have already started to diminish. After last week’s gyrations in global stock markets, largely tied to fears about China’s slowing economy, the debate over whether the Fed should hike rates was renewed. With a key policy meeting set for Sept. 16-17, at least five Fed officials spoke publicly in what amounted to a jockeying for position on whether increasing the Fed’s benchmark overnight lending rate was too risky amid an economic slowdown in China, a rising US dollar and falling commodity prices. “It’s early to tell,” Fischer told CNBC on the sidelines of the annual central banking conference in Jackson Hole, Wyoming. “We’re still watching how it unfolds.” He, along with other Fed officials, acknowledged that the global equities sell-off that began last week would influence the timing of a rate hike, which until only a couple of weeks ago seemed increasingly likely to occur in September.

He described job growth as “impressive” and said there had been a “pretty strong case” to raise rates in September before the latest round of global turmoil. 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. 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.

Louis Fed President James Bullard told Reuters he still favored 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. Michael Hanson, senior economist at Bank of America Merrill Lynch, saw Fischer’s remarks as an explanation of why the Fed might not wait for inflation to move closer to 2 percent before raising rates.

John Silvia, chief economist at Wells Fargo, said that based on Fischer’s comments, he thinks the first rate hike will come next month if the August jobs report that will arrive Friday is strong and financial markets settle down. There’s simply no need for the Fed to keep propping up the economy with such low rates. ‘You look around Boston and other cities, like New York and San Francisco, and you see the effects — all the commercial construction going on, being built with cheap money. 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. Instead, he argued, the central bank should consider expanding its stimulus campaign to address the persistence of low inflation, which can harm consumer spending and business plans for expansion.

The US government reported this week that the economy grew at a 3.7 percent annualized 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. 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 percent target.

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.” Inflation, they add, is so low that a shock that further weakens the economy could lead to deflation, the destructive cycle of falling prices and wages, and high unemployment.

The Fed needs to re-think “full employment in a way that recognizes 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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