Wall Street ends flat in quiet end to dramatic week

29 Aug 2015 | Author: | No comments yet »

EUR/USD moves lower, following Fischer’s comments on possible rate hike.

A week ago, it seemed almost certain: The Federal Reserve would raise its key short-term interest rate next month after holding it near zero for close to seven years.In an interview with FOX Business Network’s Peter Barnes, Atlanta Federal Reserve President Dennis Lockhart said Americans shouldn’t worry about a recession, despite recent turmoil in global markets. “We’re not falling into a recession,” Lockhart said. “The economy actually is performing quite solidly, I think. 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.

Most of the data we’ve looked at recently had been positive and has confirmed my basic view– and that is we’re growing at a moderate pace, we’re making steady progress in employment markets and I have every reason to believe that will continue.” The Atlanta Fed President added that from the central bank’s point of view, monetary policy has been supportive of the economic growth America has achieved, but to continue to build on that momentum, the economy has to rely on itself, not accommodative policies. 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. The comments, uncoordinated but generally consistent, suggested that some investors and analysts had been too quick to discount a September rate increase, particularly as global markets finished the week on a relatively quiet note on Friday. “We haven’t made a decision yet, and I don’t think we should,” Stanley Fischer, the Fed’s vice chairman and a close adviser to the Fed chairwoman, Janet L.

One of those substantial improvements has to come in the form of inflation, for which the Fed has set a 2% target, and full employment in the labor market before the Fed hikes rates. “I do believe there is still a considerable amount of slack in the employment markets, particularly represented by under employment by people who are working part time involuntarily,” he said. “I think the next three meetings should all be live meetings and I think we should keep our options open. 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. Speaking exclusively with CNBC, Fed vice chairman Stanley Fischer indicated that recent U.S. economic data had been impressive providing a compelling argument for short-term rates to head in a higher direction. 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.

Currency traders await a panel discussion by several influential central bankers on Saturday, including Fischer at a conference in Jackson Hole for further indications on how global inflation could impact the Fed’s decision on hiking short-term interest rates next month. The three-day summit at the mountaintop resort in Wyoming will conclude on Saturday with the most anticipated event of the conference – a symposium that will also feature Bank of England governor Mark Carney and Reserve Bank of India governor Raghuram Rajan.

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. Fischer, a noted Dove, could provide some clarity on the Fed’s relatively ambiguous interpretation of its short-term projections on inflationary growth. Last week’s release of the July minutes from the Federal Open Market Committee’s last meeting painted a picture of a sharply divided Fed regarding their views on inflation. Joseph Stiglitz, a Columbia University economist and Nobel laureate, said Thursday that the Fed was on the verge of repeating an old mistake by raising interest rates sooner than necessary to control inflation. Based on futures prices, investors see a 38 percent chance the Fed will move at the September meeting of the Open Market Committee and a 49 percent probability of a rate rise at the Oct. 27-28 meeting, according to Bloomberg.

He pointed out that the share of Americans with jobs remained unusually small and wages were rising only slowly. “There hasn’t been a recovery for the majority of Americans and so to me this is a no-brainer,” Mr. Other members, however, said that inflation conditions for a rate hike would be met or could be “met shortly.” The Consumer Price Index for July inched up 0.1% on a month over month basis, below consensus estimates of a 0.2% increase. Stiglitz told a coalition of community groups who call themselves “Fed Up” that met just outside the main conference to advocate against a rate increase. “I don’t even know why we’re talking about” tightening monetary policy, he said. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, rose more than 0.5% to an intraday high of 96.35, before falling back slightly to 96.15 in U.S. afternoon trading. 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.

Even with a stated target of 2 percent a year, he said, actual inflation is significantly lower. “We wind up with a monetary policy that has been consistently too tight,” he said. 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.

But if volatility persisted, the Fed would be less likely to move. “If you don’t understand the market volatility, and I’m sure we don’t fully understand it now — there are many, many analyses of what’s going on — then yes, it does affect the timing of a decision you might want to make,” he said. Fischer emphasized that Fed officials could not afford to wait until all of their questions were answered and all of their doubts resolved. “When the case is overwhelming,” he said, “if you wait that long, then you’ve waited too long.”

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