Fed’s Stanley Fischer keeps September rate rise on the table

31 Aug 2015 | Author: | No comments yet »

Editorial: Memo to Fed: It’s OK.

The torrent of words from the annual conference sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., this past week, and from the satellite meetings there, throws no light on whether the Fed will raise interest rates next month. 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. 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.

If rates don’t rise at least a bit, businesses and consumers will conclude that the Fed still expects choppy economic waters and will pull in their only recently extended horns. Stock price declines in China, on Wall Street and around the world make headlines, but they were inevitable — sometime — after five years of suppressed interest rates that lured investors into buying shares to chase dividends, when they could earn only pitiful yields on bond investments. 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. 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 Commerce Department’s routine revision of second-quarter data showed the economy rising at an annual rate of 3.7 percent, far better than the 2.3 percent of the first assessment.

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. 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. 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 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. But after Fischer spoke, traders added to bets that a rate hike would come this year, with overnight indexed swap rates implying a 35 percent chance the Fed would move in September and a 77 percent chance of a December move. 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 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. William Dudley, president of the New York Federal Reserve, helped ignite a Wall Street rally this week when he told reporters that the case for raising rates in September was “less compelling to me” that it had been a few weeks ago, before sudden fears about China’s economy upset global markets. 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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