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Fischer Speaks At Jackson Hole: "Fed Should Not Wait Until 2% Inflation To Begin Tightening"

Today's most anticipated event at tthis year's Jackson Hole event was the panel on "Global Inflation Dynamics", not because there is any core inflation in the world (at least not in the way the CPI measures it), especially not now that China is finally in the deflation exporting business, but because the most important speaker at this year's Jackson Hole, Fed vice chairman Stanley Fischer, alongside BOE's Mark Carney, the ECB's Constancio and the RBI's Raguram Rajan, would comment.

Moments ago he just did, and courtesy of Market News, here are the highlights:

  • FISCHER: SHLD NOT WAIT TIL 2% INFL TO BEGIN TIGHTENING
  • FISCHER: NEED TO 'PROCEED CAUTIOUSLY' IN NORMALIZING POLICY
  • FISCHER: FED FOLLOWING DEVELOPMENTS IN CHINESE ECONOMY
  • FISCHER: RATE PATH MATTERS MORE THAN TIMING OF FIRST HIKE
  • FISCHER: RISE IN DOLLAR COULD RESTRAIN GDP GROWTH IN '16, '17
  • FISCHER: $ MAY HOLD DOWN CORE INFL 'QUITE NOTICEABLY' THIS YR
  • FISCHER: NEED CAUTION IN ASSESSING INFL EXPECTATIONS AS STABLE
  • FISCHER: 'GOOD REASON' FOR INFL TO MOVE UP AFTER OIL/$ PASSES
  • FISCHER: CORE INFL 'TO SOME EXTENT' IMPACTED BY OIL PRICES
  • FISCHER: ECON SLACK IS ONE REASON CORE INFL HAS BEEN LOW
  • FISCHER: OIL PRICE IMPACT 'OUGHT' TO BE LARGELY ONE-OFF EVENT
  • FISCHER: LABOR MARKET 'APPROACHING' MAX EMPLOYMENT OBJECTIVE

As AP notes, Fischer said there's "good reason to believe that inflation will move higher as the forces holding down inflation dissipate further." He says, for example, that some effects of a stronger dollar and a plunge in oil prices have already started to diminish.

Both in his speech Saturday and in an interview Friday with CNBC, Fischer made clear that the most recent economic data and the direction of financial markets over the next two weeks would help determine whether the Fed raises rates next month.

 

In the CNBC interview, 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 issue is hazier because the Fed needs to assess the economic impact of events in China and on Wall Street.

More details from MNI:

Federal Reserve Vice Chair Stanley Fischer said Saturday the U.S. central bank should not wait until it sees 2% inflation to begin tightening policy, but it should proceed cautiously in removing accommodation.

 

"With inflation low, we can probably remove accommodation at a gradual pace," Fischer said in remarks prepared for a panel discussion at the close of the Kansas City Fed's annual Economic Symposium here.

 

Yet, he added, "because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening."

 

Fischer, who as a member of the board votes at every meeting of the Federal Open Market Committee, did not comment on a particular time for the first rate hike in more than nine years. He did say, "For the purpose of meeting our goals, the entire path of interest rates matters more than the particular timing of the first increase."

 

That path will be decided by the progress on the Fed's price stability mandate as progress in the labor market continues and is "approaching our maximum employment objective," Fischer said.

 

"To ensure that these goals will continue to be met as we move ahead," Fischer said, "we will most likely need to proceed cautiously in normalizing the stance of monetary policy."

 

Right now though, progress on the Fed's inflation objective is being weighed down by a significant drop in oil prices and a stronger U.S. dollar since last year.  Fischer estimates the rise in the dollar, about 17% in nominal terms since last summer, will restrain real GDP growth through 2016 "and perhaps into 2017 as well."  It "could plausibly be holding down core inflation quite noticeably this year," he said.

 

The lower oil prices could also put downward pressure on core inflation, even though this measure is designed to strip out the effects of the volatile prices.

 

"Note that core inflation does not entirely 'exclude' food and energy, because changes in energy prices affect firms' costs and so can pass into prices of non-energy items," he said.

 

Overall, though, Fischer sounded optimistic these factors will prove transitory. "While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade," he said.

 

"The same is true for last year's sharp fall in oil prices, though the further declines we have seen this summer have yet to fully show through to the consumer level," he said.

 

The transitory nature of these factors and "given the apparent stability of inflation expectations," he said, "there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further."

 

In addition, "slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well," he said.

 

But Fischer warned that Fed olicymakers should "be cautious in our assessment that inflation expectations are remaining stable."

 

One reason "is that measures of inflation compensation in the market for Treasury securities have moved down  somewhat since last summer," he said.

 

He added, though, "these movements can be hard to interpret, as at times they may reflect factors other than inflation expectations, such as changes in demand for the unparalleled liquidity of nominal Treasury securities."

 

Fischer didn't comment much in his prepared remarks on other recent financial market volatility, except to say "At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual."

In broad terms, this is a repeat of what he told CNBC's Liesman yesterday, which resulted in the market getting spooked in a "not dovish enough" reaction, if only until the last 15 minute mauling of VIX, which sent the DJIA down from -110 to almost positive.

What is clearly missing from Fischer's speech is even the faintest grasp that China is now actively exporting deflation via active devaluation, which is a double whammy for the Fed's "financial conditions" as it means not only will US inflation remains persistently low (the way the BLS measures it), but the ongoing selloff in TSYs will force the Fed to get involved soon, especially if ongoing selling in both TSYs and stocks wreaks more havoc with 'risk parity" models, potentially forcing the world's biggest hedge fund Bridgewater to delever and/or unwind some of its massive $150+ billion in positions.

However once again, the most important question was missing: now that China is engaging in reverse QE and selling tens if not hundreds of billions in US Treasurys every month, with the US facing a $450 billion budget deficit (hence needing to issue half a trillion in debt), the Fed balance sheet contracting by over $250 billion, just how does the Fed plan on tightening if what it should instead be doing is easing, and massively at that.

Full speech here (link):