Fed’s Fischer sees inflation rebound, allowing gradual rate hikes

31 Aug 2015 | Author: | No comments yet »

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

JACKSON HOLE: 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.

THE UPWARD revision to American GDP on August 27th provided a shot in the arm to global stockmarkets, which have endured their most volatile week of trading in years. Some top policymakers, including Fed Vice Chairman Stanley Fischer, said recent volatility in global markets could quickly ease and possibly pave the way for the US rate hike, for which investors, governments and central banks around the world are bracing.

The American economy is now thought to have grown by 3.7% at an annual rate in the second quarter, a much higher estimate than the 2.3% that was given in an initial evaluation of the quarter. 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 so much bad news about the Chinese economy, which has been a factor behind the meltdown of Chinese share indices, the US figure came as a relief to markets. 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.

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. 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. 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. 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.

Some quick-and-dirty analysis of the data suggests that whenever the Fed changes rates, the Bank of England has a 23% chance of also changing rates (in the same direction) in the subsequent three weeks. Investors and economists have been betting the Fed would delay a policy tightening to December or later, prolonging the monetary stimulus that has kept rates at rock-bottom levels for more than six years and has pumped trillions of dollars into the global banking system. The next week, the Labor Department announced that the economy had added an estimated 215,000 jobs in July. “We now await the results of the August employment survey,” Mr. Too-low inflation also makes the inflation-adjusted cost of loans more expensive. “In making our monetary policy decisions, we are interested more in where the U.S. economy is heading than in knowing whence it came,” Fischer said in his remarks, which were released in Washington. “We need to consider the overall state of the U.S. economy as well as the influence of foreign economies on the U.S. economy.” With Fed Chair Janet Yellen having decided to skip this year’s Jackson Hole meeting, Fischer’s speech on the closing day of the conference drew top attention at the high-profile event, with his words parsed for any signals about the Fed’s timetable for a rate hike.

Fischer said on Saturday, “which are due to be published on Sept. 4.” As for inflation, the Fed has said repeatedly that it will act based not on observed inflation but instead on its expectations for future inflation. 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. The Fed’s preferred measure of inflation shows that prices rose 0.3 percent during the 12 months ending in July, well below the 2 percent annual pace the Fed considers healthy. 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. 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.

As a neighbor and trading partner, what’s your diagnosis of how serious those economic problems are and how policy makers are managing whatever it is they’re going through? Officials say they are not inclined to act in the face of volatility, in part because they see little practical difference between moving in September and waiting a little longer. RAJAN: Well, I think that people are certainly a little worried about what is—what is happening in the stock market and how much of an official role there has been and how that plays out. And my sense is in that—from the perspective of emerging markets—one could argue it’s preferable to have a move early on and an advertised, slow move up rather than, you know, the Fed be forced to tighten more significantly down the line.

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