Global Economy Weekahead: China fears linger as focus on Fed sharpens

31 Aug 2015 | Author: | No comments yet »

Editorial: Memo to Fed: It’s OK.

LONDON (Reuters) – Fears over the health of the Chinese economy kept world markets on edge last week and China country will remain in focus, along with the question of whether the Federal Reserve will raise interest rates next month. Washington: 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. 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.

Markets will therefore be watching business surveys, factory orders and trade data from the world’s largest economy as well as the employment numbers due on Friday. “The week finishes with non-farm payrolls for August, typically the biggest market mover globally, and definitely on the Fed’s radar given unemployment is already close to full employment and the Fed looking to gauge whether there is `some’ further labour market improvement,” economists at National Australia Bank said. 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/s. “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. 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. 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.

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 per cent 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. 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. 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. 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. The European Central Bank is expected to keep a steady hand when it meets on Thursday, days after data are likely to show there is still very little inflation in the currency bloc.

Almost half a year since the ECB started pumping 60 billion euros a month of fresh cash into the economy, annual inflation data, due on Monday, will probably still show prices rose only 0.1 percent in August – nowhere near the bank’s 2 percent target ceiling. The US government reported this week that the economy grew at a 3.7 per cent annualised 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. There is a growing chance the ECB will extend its stimulus programme beyond the planned completion in September 2016, and if inflation data misses expectations that likelihood will only increase. 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.

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. 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 rethink “full employment in a way that recognises 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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