Sunday, October 11, 2015

Fed's Fischer Says 2015 U.S. Rate Rise 'An Expectation, Not a Commitment'

U.S. Federal Reserve policymakers are still likely to raise interest rates this year, but that is “an expectation, not a commitment”, and could change if the global economy pushes the U.S. economy further off course, Federal Reserve Vice Chairman Stanley Fischer said.

“Both the timing of the first rate increase and any subsequent adjustments to the federal funds rate target will depend critically on future developments in the economy,” Fischer told a group on the sidelines of the International Monetary Fund meeting in Peru, reports Reuters.

He said he felt the U.S. economy was still generating enough jobs to continue making progress towards the Fed’s goal of maximum employment and that inflation would eventually rise. Based on that, he said, the U.S. central bank should be able to keep on track with an initial rate hike expected in October or December.

Note: This was also the case in September. What spooked the Fed in September was the mini-crash in China. And Fischer pretty much admitted this.

Reuters reports:
But he also cautioned the group that the United States is now more exposed than ever to international events and that developments in China and elsewhere had already influenced the Fed to delay a widely expected rate increase in September.
“We do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy,” he said. 
The Fed is really driving by the seat of its pants, They have no theory that drives policy. They are just watching the stock market. If the stock market is up on the days before the December FOMC meeting (or perhaps the October meeting) they are very likely to hike rates by 25 basis points.

If the markets are weak, you can be sure that Goldman Sachs economist Jan Hatzius will earn his pay by scaring New York Fed president William Dudley out of even thinking about a rate hike. They have weekly lunches.

 -RW

2 comments:

  1. Wait, seven years of ZIRP and it is the stock market moves in the "days" before the decision which will determine? I think more likely, even if the market is up strong, they will find a reason to delay further.

    Denninger at Market Ticker is pretty over the top but he has the "low interest rate results in increase in leverage" dynamic down: At half the interest rate you can roll over your debt and add more debt (to spend) at the same carrying cost so as rates went down the leverage exploded at all levels. Now any increase in rate makes the debt unsustainable and of course none can discharge it now. The choice now is raise rates and get massive defaults and massive pain or keep ZIRP.

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  2. Let's see. Unemployment (according to the government numbers) is 5.1%, the lowest it has been in 40? years. And they're still 'making progress towards the Fed’s goal of maximum employment'? I can sort of understand if they stated they were waiting for interest rates to rise. I don't know why they included 'maximum employment', unless they are waiting for that number to go down to 0%, in which case they may be waiting a long time.

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