Federal Reserve Vice Chairman Fischer Hints Inflation is Likely to Rebound

While Yao Yudong, head of the People’s Bank of China Research Institute of Finance and Banking, last week blamed the Fed for the market turmoil and said a US hike should be delayed, most central bankers from emerging markets contacted by Reuters said it will be better if the Fed gets going.

“Though slack in the labor market is putting downward pressure on inflation, in his view, that should diminish as the labor market continues to improve”.

A September rate increase hasn’t been ruled out, however. The Standard & Poor’s 500 index fell 14 points, or 0.7 percent, to 1,975 and the Nasdaq composite lost 21 points, or 0.4 percent, to 4,808. Even before China’s stock market began to plunge this week, the U.S. Federal Reserve was questioning its stance on an interest-rate increase planned for some time later this year. Palladium decreased 0.9 percent to $582.50 an ounce, set for a fourth monthly retreat.

Meanwhile Lockhart, speaking once again, commented that timing for liftoff “is close” but that it’s an “open question” whether the Fed moves now or waits a little, noting that the October FOMC is a “live meeting” and “in play”.

That has big implications for the rest of the world, not least New Zealand where rising US rates should push up the value of the US dollar and cause ours to fall further. The Fed has kept rates ultra-low since the 2008 financial crisis. The net result of this is that inflation won’t average 2 percent.

“The link between inflation and real activity appears to have strengthened in the euro area recently”, the European Central Bank’s Constancio said in a paper delivered at Jackson Hole.

That’s the consensus after a meeting of economists at Jackson Hole, Wyoming over the weekend and it leaves financial markets pricing in about a 40 per cent chance of an interest rate rise for the September policy meeting. Andrew Parry of Hermes Investment Management said: ‘An interest rate rise by the Fed – more a virility symbol for the US economy’s robustness than an immediate economic necessity – would only compound the angst gripping investors’.

Stanley Fischer indicated policy makers are open to increasing borrowing costs next month, saying August 29 that there is “good reason” to believe inflation will accelerate. futures for December delivery were unchanged at $1,134 an ounce on the Comex, up 3.6 percent this month. Inflation by the Fed’s preferred measure has been running below 2 percent for the past three years. Showing that the American central bank is fully aware and keeping an eye of the situation, Fischer commented: “We need to consider the overall state of the U.S. economy as well as the influence of foreign economies on the U.S. economy as we reach our judgment on whether and how to change monetary policy”. But he, nonetheless, acknowledged that the Fed was in fact concerned about the impact of China’s economic slowdown.