Fed’s Fischer says not clear how Fed discussions could affect China stocks

30 Aug 2015 | Author: | No comments yet »

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

What once seemed a sure bet – that the US Federal Reserve would raise interest rates in September – suddenly appears less certain following a wild week of stock market turbulence.

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. 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. 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 U.S. 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.

Fischer’s message: Incoming economic data and market developments over the next two weeks will play crucial roles in determining whether the Fed raises interest rates at its September meeting. U.S. 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. Now, the jury is out because the Fed needs to assess the economic impact of events in China and on Wall Street. ”When the case is overwhelming, if you wait that long, you will be waiting too long,” Fischer said. ”There is always uncertainty, and we will just have to recognize that.” Fischer tried to reassure markets, as Yellen has, that when the Fed begins to raise rates, it plans to do so very gradually. 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.

He repeated the guidelines the Fed is using to determine when to raise its key short-term rate, which has been held near zero since 2008 and has helped keep borrowing rates low throughout the economy. 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. Fischer said his ”confidence is pretty high” that low levels of inflation will head toward the Fed’s target of 2 percent as temporary effects from a big drop in energy prices fade.

The U.S. 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. 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. 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. Esther George, president of the Kansas City Federal Reserve, which sponsors the Jackson Hole conference, said she was taking a ”wait and see” approach. ”We’ve seen data that suggests the economy is strong enough to act.

The Fed decision has drawn unusually intense interest from both foreign central bankers, who will have to respond, and from Americans on both the right and left.

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