Market watchers following the September meeting of the Federal Reserve over the next two days believe the probability is rising that it will raise interest rates in December. Reports from the US labour department showing strong inflation data for August point in that direction. But the impact on the economy of Hurricanes Harvey and Irma will give the Federal Open Market Committee justification for postponing an increase this month.
At the annual Jackson Hole symposium between 24-26 August, Fed Chair Janet Yellen seemed determined not only to frustrate the battery of people looking for monetary policy signals, but also weaken any administration arguments for appointing her to a second term after February 2018.
She could have spoken on her caution about raising interest rates, which Donald Trump would have received well. Instead, Yellen reiterated the importance of bank restrictions that the administration believes are hindering lending.
‘Because of the reforms that strengthened our financial system, and with support from monetary and other policies, credit is available on good terms, and lending has advanced broadly in line with economic activity in recent years, contributing to today’s strong economy,’ Yellen said, without making any direct comments on the direction of monetary policy.
The discussion at Jackson Hole was less about short-term monetary measures and more about the potential impact of Washington’s erratic behaviour on policy. The resignation on 6 September of Vice-chair Stanley Fischer, a vocal opponent of Trump’s deregulation proposals, further complicates Fed-White House relations.
The minutes from the July meeting of the FOMC said ‘several participants noted that uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade, and healthcare, was tending to weigh down firms’ spending and hiring plans.’
The minutes added that ‘a few participants suggested that the likelihood of near-term enactment of a fiscal stimulus programme had declined further or that the fiscal stimulus likely would be smaller than they previously expected.’
Markets expect details about how the Fed will wind down its balance sheet to become clearer at its September meeting. The balance sheet has swollen to more than $4tn through Fed bond purchases for quantitative easing. ‘At the next possible opportunity I think we should begin that process of letting the balance sheet run down,’ Robert Kaplan, head of the Dallas Fed, said in an interview at Jackson Hole.
Kaplan is already on the record as being in favour of waiting for stronger inflation before any further rate increases. He reiterated this view in the interview: ‘I’m not saying I won’t be in favour of raising rates before the end of the year. I think we have the ability to be patient, and I want to see more information that suggests we’re making progress toward meeting our 2% inflation objective.’
Kaplan said the ‘natural’ interest rate is lower than people think, so that Fed policy is less accommodative than it might appear. Other Fed officials have cited one-off effects, such as cuts in mobile phone rates, to explain the soft inflation numbers.
Esther George, chief of the Kansas City Fed and host of the Jackson Hole conference, however, affirmed her hawkish reputation. She believes there will be another interest rate hike before the end of the year.
‘I’ll be looking at the data in the next few weeks as we get ready for the September meeting, and see whether that still makes sense,’ she said. ‘Based on what I see today, I think there’s still opportunity to do that.’
While acknowledging the traditional relationship between low unemployment and inflation has broken down, George said she preferred to look at the strength of the economy in general.
She favours removing at least some accommodation through starting to wind down the balance sheet. ‘The estimates suggest the economy is in a good place to begin doing that,’ she said.
Darrell Delamaide is a writer and editor based in Washington.