As the Great and the Good gather at Jackson Hole, the Fed finds itself in something of a hole of its own

Thursday 27th August 2015

 

As the Great and the Good gather at Jackson Hole, the Fed finds itself in something of a hole of its own

 Ref : "US rate rise falls fast down the probability scale" , The Financial Times, p.28

Central bankers, academics and major players are arriving for the annual event hosted by the Kansas Fed. Given the extreme jitters affecting markets, every statement will be forensically analysed for clues as to the timing of the long-signposted rate hike, even though Fed Chairwoman Janet Yellen is not herself attending. The Fed has been pursuing a policy of communicating with the markets in order to avoid shocks to the system when it does pull the trigger, but that strategy has been undone by recent turmoil and views on the likely lift-off vary more than ever.

Make no mistake... the Fed is keen to raise rates and to start the journey back towards a more normal rate structure within an economy showing reasonable growth. New York Fed boss William Dudley said yesterday that he hoped rates would rise this year, and that it was important not to overreact to short-term market developments. Unfortunately for the hawks he also said that the case for a September rise was "less compelling" than a few weeks ago. This less-than-stridently doveish comment sparked a huge bounce in share prices that tells us all we need to know about how sensitive the markets are in this environment.

 The hawks argue the point (correctly) that it's not the Fed's job to support or even boost asset prices. Memories of the infamous "Greenspan Put" still burn in many memories, not least the Fed's. The "Put" in this instance means a put option (to sell) , and refers to the habit of then Fed Chairman Alan Greenspan responding to sharp market reversals by interest rate cuts. This gave speculators the impression that they were at least in part insured against downside risks and therefore encouraged a price bubble and subsequent collapse. Not pretty ....

 The hawks would also say that the Fed's brief is a domestic one should address US economic issues. Well, that's true as far as it goes but is a far shakier argument and misses the point about the possible implications of a US rate rise. The US is part of the global economy and action that causes havoc elsewhere will negatively impact the US' own performance. The Fed must take that into consideration.

 

So when, then ?

 There's still a reasonably strong body lobbying for September. A rise of just 25 basis points is hardly draconian, they say, and let's get any jolts out the way and get started sooner rather than later. The timing can never be perfect for everyone, anyway.

October is now an option. The Fed meets in October but (faintly ridiculously) it was not previously considered a likely date because there is no press conference scheduled. It would give markets an extra month to settle down.

December is probably the current favourite, largely because it represents the compromise position of getting the desired hike in this year and taking a cautious approach with markets in mind.

 Some influential institutions and commentators believe that the situation is so precarious that the Fed should wait until next year, say March. Former US Treasury secretary Larry Summers and Bridgewater boss Ray Dalio have even brought up the possibility of the Fed easing policy (yes, really) by re-starting its QE programme.

So there you have it.... how do you satisfy that range of views? The Fed will be criticised whatever it does. Of course, it's not in a popularity contest but we wish it the best of luck anyway.