Optimistic About Inflation, Stanley Fischer Suggests That Fed Will Stick to …

30 Aug 2015 | Author: | No comments yet »

Fed says rate hike next month hinges on market volatility.

JACKSON HOLE, Wyo. 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.

Jackson Hole, Wyoming: 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 Federal Reserve’s vice chairman, Stanley Fischer, said on Saturday that he saw “good reason” to expect that inflation would rebound to a healthier pace as the American economy continued to grow. However, he says as and when the Fed hikes rate, it will be a gradual process. “The first move presumably will be from zero to 25 basis points and then 25 to 50, which means that our interest rate will still be below the British rate,” he adds. 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. He says: “Market volatility does affect the timing of a decision you might want to make.” However, he expects a reverse in the current global situation soon.

In an interview Friday with CNBC, Fischer acknowledged that before the recent market volatility, ”there was a pretty strong case” for a rate hike at the Sept. 16-17 meeting, though it wasn’t conclusive. 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. The abrupt fall in Dow last week was a reaction to the crash in Chinese market, he says adding that: “It was a reaction to something, which had potential to be very big.” He adds that China’s economy will have minute impact on US exports.

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. The cause of concern, he says, is the “interactions among China and other countries will amount jointly to something that would have an impact on us.” A: I think it’s early to tell. 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.

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. 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.

A: If the relatively small depreciation, which happened with the Chinese devaluation, with the relatively small appreciation, it will have some small impact. So we’ll see what happens by the September meeting,” George, who doesn’t have a vote on the Fed’s policy committee this year under the committee’s rotating system, told Fox Business Network.

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 U.S. joblessness among blacks is twice that of whites. Q: If those factors are transitory and you have confidence that they are transitory, should that then not stop you from taking action on rates, because you are confident that these will go away.

Americans are buying more cheap imports, holding down the cost of living, while American companies are struggling to sell exports, putting a damper on economic growth. “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” he said. “While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade.” “I will not, and indeed cannot, tell you what decision the Fed will reach Sept. 17,” he said, referring to the date of the Fed’s next policy meeting. 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. You see that all the time, you see that particularly in the ability to absorb unemployed which has been going on steadily for six-seven years – that we are getting back to normal and at some point we will want to show that by beginning to normalize interest rates.

Q: It’s sort of interesting the last couple days, you had this huge – our research showed that we moved 10,000 points in the Dow, but some of that was up and some of that was down. Q: So I think everybody’s going to want to know an answer to maybe a more direct question, if you don’t mind – which is September, when I hear you talking, is still alive as a possibility for raising rates? We have got a little over two weeks before we make the decision and we have got time to wait and see the incoming data and see what exactly, what is going on now in the economy. Q: Wouldn’t you think there would be an overwhelming case though in one way or the other that you would be sure and confident that look, there’s this, you know, unimpeachable case that it’s time to go forward?

And they are regarded as doing quantitative easing, etc, etc. so we are not moving from a wonderfully extremely expansionary in monetary policy to a tight one. Q: What about concern that what the market would do is immediately price or bring forward the whole trajectory of rates and so that rather than looking at just a 25 basis point increase in the borrow in cost for corporations, you are looking at a much larger one?

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