Fed vice chair in spotlight on possible rate hike

29 Aug 2015 | Author: | No comments yet »

Fed Officials Don’t Seem in the Mood to Wait for September Rate Increase.

WASHINGTON — What once seemed a sure bet — that the Federal Reserve would raise interest rates in September — appears less certain after a wild week of stock market turbulence. Federal Reserve Vice Chairman Stanley Fischer on Friday left open the option of an interest rate increase next month, while two other Fed officials raised the prospect that action would be taken in October. 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. Here’s how it works: Initially, a flurry of news stories appear about how, a few months hence, the Fed intends to raise short-term interest rates for the first time in years.

Fischer was the most senior Fed official to speak Friday during a barrage of live television interviews at the Kansas City Fed’s annual retreat in Jackson Hole, Wyo., as policymakers debated what market turmoil means for the U.S. 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. Second, the predictable market swoon, as Wall Street traders ponder the fact that the morphine drip of free money that they have been enjoying since the aftermath of the 2008 financial crisis might be pulled out of their arms. European central bankers will address the conference Saturday, providing an international perspective on market convulsions and slower Chinese growth during a panel on global inflation, in which Fischer will also take part. “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,” he said. “I wouldn’t want to go ahead and decide right now what the case is, more compelling, less compelling,” for a September increase. 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 the week on a relatively quiet note on Friday. “We haven’t made a decision yet, and I don’t think we should,” Stanley Fischer, the Fed’s vice chairman and a close adviser to the Fed chairwoman, Janet L.

Finally, the Fed backs away from its much-overdue policy change, causing traders to rejoice and the artificially stimulated bull market in both stocks and bonds to continue. Yellen, said in an interview with the cable network CNBC. “We’ve got time to wait and see the incoming data and see what exactly is going on now in the economy.” Mr.

It also began a program with the Orwellian name of quantitative easing — buying huge sums of bonds to suppress long-term interest rates and stimulate lending and spending. 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. This was a bonanza for those who make money from money — hedge-fund managers, private-equity moguls, banks — and a disaster for savers, retirees and anyone on a fixed income. (Have you checked the interest your bank pays you on your savings account?

Bernanke reaffirmed that decision: The Fed, he said, “currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.” Before the afternoon was out, the Dow Jones industrial average had fallen more than 200 points, or 1.4 percent, and the bond market tanked as the yield on the 10-year Treasury bond rose to 2.36 percent, its highest level since March 2012. Atlanta’s Dennis Lockhart said that “October is a live meeting, it’s in play.” “The fundamentals of the economy are really solid,” Lockhart told Bloomberg Television on Friday at Jackson Hole. “I weigh both the distance that we have traveled as well as the current outlook for the economy. Joseph Stiglitz, a Columbia University economist and Nobel laureate, said Thursday that the Fed was on the verge of repeating an old mistake by raising interest rates sooner than necessary to control inflation.

Based on futures prices, investors see a 38 percent chance the Fed will move at the September meeting of the Open Market Committee and a 49 percent probability of a rate rise at the Oct. 27-28 meeting, according to Bloomberg. He pointed out that the share of Americans with jobs remained unusually small and wages were rising only slowly. “There hasn’t been a recovery for the majority of Americans and so to me this is a no-brainer,” Mr. Stiglitz told a coalition of community groups who call themselves “Fed Up” that met just outside the main conference to advocate against a rate increase. “I don’t even know why we’re talking about” tightening monetary policy, he said. The case for raising rates is straightforward: Like any commodity, the price of borrowing money — interest rates — should be determined by supply and demand, not by manipulation by a market behemoth.

Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying. 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. Even with a stated target of 2 percent a year, he said, actual inflation is significantly lower. “We wind up with a monetary policy that has been consistently too tight,” he said.

The worsening economic news from China, combined with uncertainty about the Fed’s plans, contributed to the recent sharp declines in stock markets around the world. Fischer said there was a continuing “discussion” among Fed officials, some of whom see the strength of domestic growth as a reason to raise rates, while others argue the sluggishness of inflation means there is no reason to rush. Summers, the former Harvard president and Treasury secretary, wrote in The Financial Times, “At this moment of fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results.” He then tweeted, “It is far from clear that the next Fed move will be a tightening” (a raising of rates). Around then came a leaked note to clients from Ray Dalio, founder of Bridgewater Associates, one of the world’s largest hedge funds, agreeing with Mr. 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 argument for doing so, he said, seemed “less compelling to me than it was a few weeks ago,” noting that “international developments have increased the downside risk to U.S. economic growth somewhat.” Once the news of Mr. The gathering’s theme is the boring-sounding “Inflation Dynamics and Monetary Policy,” but it’s the perfect setting for these supposedly brilliant economists to figure a way out of this perennial Catch-22 once and for all. But if volatility persisted, the Fed would be less likely to move. “If you don’t understand the market volatility, and I’m sure we don’t fully understand it now — there are many, many analyses of what’s going on — then yes, it does affect the timing of a decision you might want to make,” he said.

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