With market turbulence casting a cloud over the outlook for US monetary policy, a top Federal Reserve official on Friday strove to keep the option of a September rate rise alive at next month’s key meeting.
Stanley Fischer, the vice-chair of the Fed’s Board of Governors, said at meetings in Jackson Hole, Wyoming that it was too early to say how the recent market tumult had affected the argument for a move next month and that no decision had yet been made.
The change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds so I wouldn’t want to go ahead and decide right now what the case is — more compelling, less compelling, etc,” he told CNBC.
“We’ve got a little over two weeks before we make the decision,” he said. “And we’ve got time to wait and see the incoming data, and see what is going on now in the economy.”
Mr Fischer spoke after William Dudley, the head of the New York Fed, appeared to dampen the prospects of a near-term move as he said the arguments for a September hike had become less “compelling”.
Mr Fischer’s comments highlight just how China’s August 11 devaluation and the market turmoil it set off have complicated the Fed’s plans for a September rate hike. China has sought to sell this month’s change in how it manages the trading band for the renminbi markets as a reform intended to let markets play a greater role in setting the currency’s value.
But markets have seen it predominantly as an expression of concern by the leadership in Beijing over the slowdown in the Chinese economy, which has been a major driver of global growth ever since the 2008 financial crisis.
That view has only grown stronger as a result of China’s failure to communicate its intentions clearly and what markets have read as evidence of panic in the government’s repeated interventions to prop up both the stock market and the renminbi in the wake of the devaluation.
Asked about the impact of a China slowdown, Mr Fischer argued that the country’s direct impact on US exports was likely to be “reasonably small”. But he added: “The concern is that there are a lot of countries influenced by trade with China. China is a major trading country, east Asia in particular is associated with that. The question is whether interactions among those countries will amount jointly to something that will have an impact on us.”
The Fed vice-chair indicated that Beijing had above all added to the uncertainty and noise in the global economy. It was still unclear what the real impact of China’s move and the market volatility it prompted would be, he said.
US economic data remains strong, with second-quarter gross domestic product growth numbers upgraded to 3.7 per cent earlier this week. The key piece of data looming in the coming days is the jobs report next Friday, with the labour market’s resilience remaining key to the Fed’s case for higher interest rates.
Asked whether the Fed was still on course for a hike, Mr Fischer said: “I think we’re heading in that direction. What’s happening in particular with the labour markets and we’ll have to see if that continues when we get the data for next week has been impressive. The economy is returning to normal. We’re not certain we are there yet.”
Further clouding the US outlook is the muted inflation picture. While the Fed is on the cusp of meeting the first half of its dual mandate — which requires it to ensure maximum employment — the second half, targeting 2 per cent inflation, is much less certain.
However, Mr Fischer said that the Fed could not wait until the case for a hike had become overwhelming. “When the case is overwhelming if you wait that long you’ll be waiting too long,” he said.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don’t cut articles from FT.com and redistribute by email or post to the web.