The sense among a large portion of Fed watchers is that turmoil in global stock markets last week probably forestalled any action by the Federal Reserve board’s Open Markets Committee to begin the process of raising interest rates from zero in the next meeting scheduled for mid-September. However, there is also a feeling that the reason for the delay is less grounded in macroeconomic reality than in the fear of sending a jumpy market into an irrational tailspin.
This weekend, monetary policy makers and others gathered in Jackson Hole, Wyoming, for the annual conference there sponsored by the Federal Reserve Bank of Kansas City. In interviews with the financial press given during the event, key FOMC figures, including Federal Reserve Board Vice Chair Richard Fischer, did not dismiss the possibility that the FOMC would start raising rates next month, but they managed to move the consensus away from a September hike.
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Fischer, for instance, said it was “too early to tell” whether the market movement would impact a decision on rates and that the FOMC would have to make its decision “amid considerable uncertainty.”
Even in that admission, the BNP Paribas U.S. Economics team pointed out in a note, Fischer helped push the likelihood of a rate hike toward a later meeting. “It seems obvious that the data released in the next two weeks will give almost no information to reduce that uncertainty since they will almost entirely relate to the period before the market correction. The labor market is where it needs to be, more or less, for a rate hike, but what the FOMC lacks is reasonable confidence in its inflation outlook. To think policymakers will be more confident in September than they were in July is ridiculous.”
Even as he helped create the expectation of a delay, though, Fischer dropped a big hint that, absent market volatility, the Fed might be inclined to get “normalization” of interest rates under way soon out of fear that extremely accommodative monetary policy could lead to sharp inflation as the economy heats up.
Some of the more dovish members of the FOMC have called for keeping rates low until it is absolutely certain that hikes are necessary.
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However, Fischer warned, “If you wait that long, you'll be waiting too long.”
As Pantheon Macroeconomics’ Ian Shepherdson put it, “In short, Dr. Fischer sounded like he would want to hike next month if only he could be sure that the Fed’s action would not trigger a further, and perhaps more severe, market meltdown. But neither he, nor anyone else, can know how markets would react to what would now be an unexpected hike.”
The BNP Paribas team saw nothing really remarkable in Fischer’s words otherwise.
“Fischer’s view that it is ‘too early to tell’ whether or not the Fed will raise rates in September is the classic central bank response to a period of market volatility. They are supposed to take carefully considered and studiously weighed views. ‘He would say that, wouldn’t he?’ was our response. Equally classic after such an episode is a period of wait and see, which is exactly what the Fed is likely to do at its September meeting.”
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All that said, nobody is saying a rate hike in September is impossible. It’s just increasingly unlikely.
Michael Feroli of JPMorgan Chase wrote that he remains “comfortable with our view that the odds of a September liftoff are higher than for any other single meeting, though somewhat less than 50% (we've put it at 35-40%). Also consistent with our view, the Fed speakers generally indicated that data and market developments between now and mid-September could easily sway the decision on whether liftoff occurs then.”
