REFILE-GLOBAL ECONOMY WEEKAHEAD-China fears linger as focus on Fed sharpens

31 Aug 2015 | Author: | No comments yet »

China fears linger as focus on Fed sharpens.

London: 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.Stanley Fischer said that 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.—Federal Reserve officials emerged from a week of head-spinning financial turbulence largely sticking to their plan to raise U.S. interest rates before the end of the year.

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 nonfarm 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. The influential US central banker was circumspect whether he would prefer to raise rates from near zero at a much-anticipated policy meeting from September 16 to 17. In a speech on Saturday, Stanley Fischer, the vice-chair of the Fed’s Board of Governors, suggested inflationary pressures could soon lead to an increase.

At the same time, Fischer, Carney and other policymakers are wrestling with the world’s stubbornly low levels of inflation, and recognising that the rapid pace of globalization over the last quarter century may have made it harder for any individual country to move inflation higher. “There are profound secular and cyclical disinflationary forces at work in the global economy,” Carney said, making it harder for central banks in London, Washington and elsewhere to reach the inflation targets they have set as a core policy goal. In New York, the Dow Jones industrial average index lost 1,000 points last Monday – a day dubbed Black Monday by Xinhua, China’s official news agency. The Fed has said it wants to be reasonably confident that inflation, which has been stuck below its 2-per cent target for a few years, will rebound in the medium term.

Fischer’s comments suggested he believed the economy is closer to that point, although he pointedly avoided sending a signal about whether the Fed will act at its next meeting. 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. Fischer said the dollar’s year-long rise played a big role in that weakness, and it could restrain US gross domestic product growth through 2016 and even into 2017 — all the more reason to ‘proceed cautiously’ in raising rates, he said.

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 per cent in August — nowhere near the bank’s 2 per cent target ceiling. He has lost his share of battles over policy, including the decision last October to end the Fed’s bond-buying program. “I’ve won some and lost some. 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. Markets, on alert for any sign policymakers were ruling out a September liftoff, read Fischer’s remarks as suggesting a tightening would at least come this year.

The annual retreat to Jackson Hole, Wyoming, which has in previous years been dominated by discussion about the oncoming collapse of Lehman Brothers in 2008 and the Greek debt crisis, this year focused on what impact a Chinese slowdown could have on the US economy. Fischer, the most senior speaker at Jackson Hole in the absence of Fed chair Janet Yellen, left the door open Saturday for a Fed rate increase in September. Carney said a slowdown in China could depress UK inflation further but it did not, for now, change his central bank’s position on when and how it might raise rates. Fed Chairwoman Janet Yellen, who didn’t attend the Jackson Hole symposium, also needs to confer with officials to assess what kind of consensus she can build.

Before the meeting, Fischer had said it was too early to say whether the market turmoil had had an effect on the decision. “I think it’s early to tell: the change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is – more compelling, less compelling, et cetera,” he told CNBC. Earlier in the week, after two days of steep stock-market declines, New York Fed President William Dudley, in comments to the media, clearly backed away from a September move. Last month, non-farm payrolls increased by 215,000 as a pickup in construction and manufacturing jobs offset further declines in the mining sector, and figures for previous months’ reports were revised up.

They noted investors were largely able to meet demands for cash to bolster funds they had borrowed for investments, in what is known as a margin call, without setting off a spiral of selling. Officials also said they saw few signs of stress in banks, brokers and others. “The dog that hasn’t barked in the wake of recent market turbulence has been any hint of distress at any major financial institution,” said Mark Carney, governor of the Bank of England. The Commerce Department said GDP increased by a 3.7% seasonally adjusted annual rate in the second quarter of 2015, up from the initial estimate of 2.3% growth.

If the Fed raises rates while other major economies proceed with efforts to reduce rates or add other financial stimulus to their economies, the U.S. dollar would likely continue rising. Though other officials don’t want to delay a first rate increase much longer, persistently low inflation is likely to reinforce their inclination to proceed with great caution after the first move. Falling oil prices “might change the path of interest rates” after the Fed first raises them, Cleveland Fed President Loretta Mester said in an interview. She said she was already thinking about reducing her estimate of how high short-term interest rates will go in the coming years, to 3.5% from 3.75%, in part because the economy has been growing only slowly even with near-zero rates. “We will most likely need to proceed cautiously in normalizing the stance of monetary policy,” Mr.

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