Fed may raise US rates by December — or may not
To write that the Fed may raise US rates by December is not news but it was the conclusion of the Annual Symposium for central bankers that was held at the weekend at the Grand Teton National Park, Jackson Hole, Wyoming, and hosted by the Federal Reserve Bank of Kansas.
Stanley Fischer, the Federal Reserve’s vice-chairman, said on Saturday: “There is good reason to believe that inflation will move higher as the forces holding inflation down — oil prices and import prices, particularly —dissipate further.”
The Fed's annual inflation target is 2% and the Bureau of Economic Analysis (BEA) reported Friday that the annual personal consumption expenditures (PCE) price index, excluding food and energy, was 1.2% in July.
On Thursday, gross domestic product (GDP) was reported to have expanded at a 3.7% annual pace instead of the 2.3% rate reported last month, the BEA said on Thursday in its second GDP estimate for the April-June period.
However, The Wall Street Journal says that an alternative measure of economic output, gross domestic income, advanced at a much slower 0.6% pace last quarter. "By that gauge, economic growth barely inched ahead in the first half of the year. (GDI advanced at 0.4% pace in the first quarter versus a 0.6% increase for GDP.)"
The Journal said that the GDI and GDP measure the same thing: the size of the economy. GDP measures production based on what is spent by consumers, businesses and governments, while GDI measures the income generated from production. So, things like wages, corporate profits and taxes.
"In theory, the two measures of output should be identical. But since they come from different source data, they can differ widely from quarter to quarter. For example, in the first quarter of 2012, GDI advanced 7.7%, while GDP increased at a 2.7% pace. In the third quarter of 2007, GDI fell at a 2.2% pace but GDP advanced 2.7%. Both measures are adjusted for inflation."
The Council of Economic Advisers recommends a blend of the two rates — so a third GDP estimate may well show a downward revision.
Papers presented at the symposium suggest the need for a revision also in conventional views on inflation and the impact of exchange rate changes.
"I will not and indeed cannot tell you what decision the Fed will reach by Sept 17," Fischer told the central bankers and other economists on Saturday.
He said the Fed awaits the Labor Department's August jobs report on Sept 4. The past three months have seen monthly nonfarm payrolls growth average 235,000, "well above the amount needed to continue the strengthening of the labour market," he said.
“There shouldn’t be this intense interest in a quarter-point increase, and there shouldn’t be this intense interest in whether it comes in September or December,” said Alan S. Blinder, a Princeton economist and the Fed’s vice chairman in the mid-1990s, as reported by The New York Times. “But the Fed remains the center of the financial universe. People stare at it like they stare at the North Star.”
“The conference was more about what we don’t know, about a candid willingness to analyze what we don’t know,” said Lucrezia Reichlin, a professor at London Business School and former director general of research at the European Central Bank. “It did not really inspire confidence” in monetary policy.
“You haven’t had inflation for seven years and the model is not working very well in predicting the economy,” said Kenneth Rogoff of Harvard University, according to the Financial Times. “How confident can you be that it is around the corner?”
A US rate increase will ripple around the globe, including a raised risk of currency depreciation and capital outflows in emerging markets, though international officials say they are prepared. But financial-market turmoil could create additional complications overseas for a Fed move. “If it adds to already a high level of volatility, that will not be productive,” Raghuram Rajan, Reserve Bank of India governor, said in an interview, according to The Wall Street Journal. “But if it comes at a time when volatility is relatively low, I think we all know that it has to happen at some point.”
There were also fringe conferences at Jackson Hole, representing right and left.
“Fed Up” is mostly funded by the foundation of a Facebook co-founder, Dustin Moskovitz, which said: “Our best guess is that the campaign is unlikely to have an impact on the Fed’s monetary policy, but that if it does, the benefits would be very large.”
“I am in Jackson Hole because I have a personal stake in the Federal Reserve Bank focusing on full employment and living wages instead of raising rates. If the Fed continues to focus on talking about prematurely raising interest rates, it will just be harder for my two sons to get out of the trap of underpaid work that is either temporary or not nearly close to the kind full time work they need,” said Claudia Nelson, chair of the board of directors at Communities Creating Opportunity in Kansas City, Missouri.
Jim DeMint, president of the Heritage Foundation and a former US senator, spoke at the conservative conference of “a long and difficult battle that we can and must win,” and he added "Many people are heavily invested in this mountain called the status quo: the government institutions work for them, and they’re afraid that if anything is changed to make the system work for everyone, they’ll lose power or money. Others build their careers justifying our dysfunctional government systems, and denigrating those who fight to change them."
1) Top pic of Mount Moran among the Grand Tetons, reflected in String Lake 2) Bottom pic of Aspen trees in autumn, near the Grand Teton National Park, Wyoming — courtesy of the US National Park Service.