Rattled investors brace for big week as Federal Reserve considers rate increase

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.

JACKSON HOLE (Wyoming) • The US Federal Reserve will give serious consideration to raising its benchmark interest rate in the middle of next month, particularly if volatility subsides in financial markets, according to a number of Fed officials last Friday. 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.

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. 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. 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.

The sharp fall in oil prices and the decline of long-term interest rates should increase growth, while a stronger dollar and a weaker global economy are likely to have an offsetting impact. 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.

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. 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. Pollock, a resident fellow specializing in financial affairs at the American Enterprise Institute, a Washington think tank. “The rates should be raised.” Like others who favor a Fed rate increase, Pollock said Fed policies — low interest rates and the earlier “quantitative easing” program of pumping hundreds of billions of dollars into the economy by buying government and other securities — have created distortions in markets that have led to surging stock, bond, and real estate prices.

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. 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. Minneapolis Fed President Narayana Kocherlakota, a dove who wants to stand pat on rates until the second half of 2016, said in an interview China’s slowdown heightens the risk of a US shock. “There’s just no reason to go now,” he said.

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