Fed interest rate hikes less certain following market volatility
WASHINGTON – What once seemed a sure bet – that the Federal Reserve would raise interest rates in September – suddenly appears less certain following a wild week of stock market turbulence.
The market’s ride and how the Fed will react provide the backdrop for the annual high-profile economic conference in Jackson Hole, Wyoming. Fed Chair Janet Yellen decided to skip this year’s meeting, so Vice Chairman Stanley Fischer is commanding attention, with investors parsing his every word.
Fischer’s message: Incoming economic data and market developments over the next two weeks will play crucial roles in determining whether the Fed raises interest rates at its September meeting.
In an interview Friday with CNBC, Fischer acknowledged that before the recent market volatility, “there was a pretty strong case” for a rate hike at the Sept. 16-17 meeting, though it wasn’t conclusive. Now, the jury is out because the Fed needs to assess the economic impact of events in China and on Wall Street.
But Fischer said Fed officials realize they need to act before data requires them to hike rates to alleviate inflation.
“When the case is overwhelming, if you wait that long, you will be waiting too long,” Fischer said. “There is always uncertainty, and we will just have to recognize that.”
Fischer tried to reassure markets, as Yellen has, that when the Fed begins to raise rates, it plans to do so very gradually. The Fed’s key rate has been at a range of zero to a quarter-point since late December 2008.
Fischer said the first move would nudge that up by a quarter-point to a range of 0.25 percent to 0.5 percent and then pausing to monitor the impact. He said with that small increase, rates will still be historically low, continuing to provide support to consumer and business borrowers.
Fischer said his “confidence is pretty high” that low levels of inflation will head toward the Fed’s target of 2 percent as temporary effects from a big drop in energy prices fade. A government report Friday showed that the Fed’s preferred measure of inflation is up just 1.2 percent over the past 12 months. It has been below 2 percent for the past three years.
Fischer will deliver more comments on inflation in a formal speech to the conference today.
Other Fed officials who have spoken since the market turmoil hit with force have hinted at a delay. But they haven’t ruled out a hike in mid-September.
William Dudley, president of the New York Federal Reserve, helped ignite a Wall Street rally this week when he told reporters that the case for raising rates in September was “less compelling to me” that it had been a few weeks ago, before sudden fears about China’s economy upset global markets.
But Dudley added the notion of a rate hike “could become more compelling by the time of the meeting as we get additional information” about the economy.
Many analysts believe with all the new uncertainty, the Fed will be hesitant to raise rates next month.
“It isn’t just the market turbulence but global weakness which could raise questions about their targets for inflation and unemployment,” said Diane Swonk, chief economist at Mesirow Financial. She said she had pushed back her date for the first hike from September to December.