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Economy

To raise or not to raise? No direction out of Jackson Hole

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At this year's Jackson Hole symposium, a close ally of Fed Chair Janet Yellen gave no hints about the Fed's September decision.   © Reuters

JACKSON HOLE, Wyoming -- In a speech that attracted the attention of market participants around the globe, Federal Reserve Vice Chairman Stanley Fischer left the door open for a rate rise as soon as September, even as market turbulence cast a cloud over the outlook for U.S. monetary policy.

     The Fed is "following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual," Fischer said Aug. 29 at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming. The vice chairman then highlighted: "With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening." 

     The symposium, attended by central bankers, policymakers and academics, had two unofficial items on the agenda this year. One was to gather ideas about the impact of the recent turmoil in some financial markets on the global economy, and the other was to speculate on whether the Fed will raise its policy rate at the Federal Open Market Committee scheduled for Sept. 16-17. With Federal Reserve Board Chair Janet Yellen absent from the symposium, Fischer got a lot of attention because he is considered to be a close ally of Yellen.

Teeter-tottering

Many market participants interpret remarks made by Fischer during the symposium to mean the central bank is in no hurry to raise rates while the outlook remains so uncertain for both China's economy and the world's financial markets. This understanding is partly fostered by comments made by a number of Fed officials that discounted the possibility of a rate hike in September. New York Fed President William Dudley, for example, said Aug. 26 that a September increase "seems less compelling" than it was a few weeks earlier. 

     "It appears it is being decided that a rush to lift rates would result in big costs," Ryutaro Kono, chief economist at BNP Paribas Securities (Japan), said of the market's perception.

     But some central bankers who attended the symposium think the volatility emerging from China will have a limited impact on the policy decision. Mark Carney, governor of the Bank of England, is one of them. "Developments in China are unlikely to change the process of rate increases," he said. The Bank of England is also in the process of determining the timing for a rate hike. 

     It appears top Fed officials think the situation in China will not be a large impediment to a rate increase. Also, the U.S. continues to see an improvement in the unemployment rate, and if market volatility settles down, an environment conducive to a rate hike will appear to be in place. 

     There is the possibility the market is improperly pricing in the probability of a September rate hike, though. "Analysing the speeches and papers from Jackson Hole, we note several 'gaps' to the market consensus," Michala Marcussen, global head of economics at Societe General, wrote in a memo Aug. 30. If the liftoff comes in a surprise manner, it could ignite turmoil in the financial markets. 

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