US Federal Reserve vice-chairman Stanley Fischer joined the European Central Bank vice-president Vitor Constancio and Bank of England governor Mark Carney on Saturday on a panel at the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming, dedicated to discussing inflation dynamics.
Fischer said oil’s plunge not only affects total inflation but can drag down core inflation.
“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”, Fischer said in his prepared remarks. Later, in response to a questioner who said anticipation of a Fed rate increase was one factor behind the Chinese stock market’s recent decline, he expressed skepticism.
“Markets and investors were nervous anyway about this normalization anyway, after years without a raise“, said Peter Kenny, chief market strategist at Clearpool Group in New York.
This seems to indicate that at least for Fischer, the raise to the interest rates is still very much on the table, but it’s unclear just how many other Federal Reserve officials agree with his stance on the issue and the reasons for raising the rates sooner rather than later.
Asian stocks sagged on Monday after top Federal Reserve officials kept the door open for an interest rate hike in September and investors braced for China economic data this week. The financial markets reacted with mixed emotions to the July numbers because the report didn’t completely solidify whether the Fed would actually hike rates in September, or hold off until later.
Currencies in emerging markets such as Brazil, Vietnam and others have plummeted this year, driven by slowed growth in China, collapsing commodity prices and the prospect of a rate hike.
“If we were not in a position where markets are as jittery as they are as a result of the China deceleration story, it would be fair to say a rate move of 25 basis points would be able to be managed by the world’s largest economy”. It would be the Fed’s first reverse from its policy in place since the 2008 crisis of ultra-low rates that have pushed up stock prices. In his view, inflation has the potential to continue moving higher.
In the USA bond market, benchmark 10-year Treasuries notes were up 9/32 in price to yield 2.154 percent.
As the two Bureau of Labor Statistics charts above show (you can flip between the two), the growth in wages and employer costs have both headed back down and don’t appear to be saying inflation above the Fed’s 2% target is anywhere around the corner. Early this week, the rates implied chances of a September hike at about 22 percent and a December increase of 50 percent. Mr. Fischer, speaking less than three weeks before the Fed’s September 16-17 meeting, didn’t declare whether those conditions had been fulfilled.
The dollar jumped 0.6 percent against the euro before slipping back to a more modest gain at $1.1185, and the yield on the 10-year Treasury surged from 2.13 percent to 2.18 percent.