Fed Rate Strategy Remains on Track Federal Reserve officials emerged from a week of head-spinning financial turbulence largely sticking to their plan to raise U.S. interest rates before the end of the year.
During the Federal Reserve Bank of Kansas City’s annual economic symposium here, many policy makers signaled that stock-market volatility and China’s woes haven’t seriously dented their view that the U.S. job market is improving, and that domestic economic output is expanding at a steady, modest pace.
Inflation might remain low for longer thanks to falling oil prices and a strong dollar. Officials will continue to keep a close watch on markets and China. But they hope U.S. consumer-price inflation will start inching toward their 2% annual target as the economy’s untapped capacity gets used up, leaving them in position to start raising rates after several months of forewarning. (…)
“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,” said Fed Vice Chairman Stanley Fischer in comments delivered to the conference, which ended Saturday. (…)
When the time comes to raise rates, Mr. Fischer said, “we will most likely need to proceed cautiously” and with inflation low, “we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening.” “The entire path of interest rates matters more than the particular timing of the first increase.”
Fischer also said this on inflation:
As for inflation, “with regard to our degree of confidence in this expectation, we’ll need to consider all the available information, and factors relevant to certainty and uncertainty about those projections for the economic outlook, before we make that judgment,” he said.
Tim Duy helps to assess “factors relevant to certainty and uncertainty”:
But the inflation picture is not friendly for hawks and even less so after this morning:
Core-PCE inflation decelerated to a meager 0.87 percent annualized rate in July. The uptick in near-term inflation had provided strong support for a September rate hike as it was consistent with the view that last year’s disinflation was temporary. That no longer looks to be the case, pulling apart the argument that the Fed can be confident that inflation will trend back to target. If anything, all the monthly data looks like noise as inflation slowly drifts further and further away from target.
Moreover, I would have thought that Bullard would give more weight to market-based measures:
China turmoil divides Fed over inflation Indian Reserve Bank warns US not to raise interest rates
(…) James Bullard, the president of the St Louis Federal Reserve, told the FT: “I think the assessment will probably be that the outlook has not changed that much for the US economy, the market turbulence didn’t develop into something more dangerous, and so we can probably just go ahead with our existing strategy.” (…)
Central bankers emerged from meetings over the weekend with conflicting views over the effect of the China-induced market turmoil, with some leading figures downplaying the threat to their own economies even as others emphasised new risks facing the world economy.
Vítor Constâncio, vice-president of the European Central Bank, told the FT that the market had likely overreacted to China’s economic problems and that the episode need not prompt an immediate shift in western policy.
“Now the assessment is more well-grounded, because the indicators about the real economy in China don’t seem to justify the correction in the stock market,” he said. “We all know about the big challenges they face, so that is a situation we monitor very closely.”
Attending the same meetings in Jackson Hole, Wyoming, Mark Carney, the Bank of England governor, said that developments in China were unlikely to change the UK Monetary Policy Committee’s plans for “limited and gradual” interest-rate increases.
However, western policymakers are still struggling to figure out how significant the weakness in China will prove to be — in part because of the opacity of the country’s data and complexity of its decision-making processes.
A presentation by David Li, a professor at Tsinghua University with close links to Chinese officials, was well attended by central bankers on Friday, anxious for better insights into the gravity of the slowdown within the People’s Republic.
“For the people who were concerned about the forces of deflation, those clouds have darkened with China, and the question is whether it’s going to be a drizzle or a storm,” said Randall Kroszner, a professor of economics at the Chicago Booth School and a former Fed governor.
“I haven’t seen evidence that China is over the cliff, but the violent market movements suggest we don’t know. And that’s partly because of the lack of transparency in the Chinese data.”
Fed officials will be assessing several channels through which the China turbulence could affect the US — including via import prices, tighter financial conditions and the knock-on effects globally from a Chinese slowdown. The conclusions they draw will help guide discussion at the September 16-17 meetings.
Raghuram Rajan, the governor of the Reserve Bank of India, warned the US not to push ahead with the hike at a time of high uncertainty. “My position over time has been don’t do it when the world is in turmoil. It’s a long anticipated event, it has to happen sometime — everybody knows it has to happen — but pick your time,” he told CNBC.
However Richard Portes, a professor at London Business School, insisted that China’s woes had been “overhyped” in their domestic and global effects, and that they should not affect western policy.
Beijing scraps large-scale stock buying
Eurozone Inflation Stays Low
The European Union’s statistics agency Monday said consumer prices in August were 0.2% higher than a year earlier, a rate of inflation that was unchanged from June and July.
Inflation was restrained by a renewed fall in energy prices, which were down 7.1% from a year earlier. But food-price inflation picked up significantly, and there were signs that the prices of manufactured goods are rising more rapidly. Excluding prices for energy, food and alcohol that are largely beyond the ECB’s influence, the core annual rate of inflation was unchanged at 1.0%.
Actually, even though they accelerated YoY, monthly core prices have been very stable since March.
German Retail Sales on the Rebound
German retail sales grew on the month in July, rebounding after June’s decline, signaling that consumers in Europe’s largest economy started the third quarter on firm footing, data from the country’s statistics office, Destatis, showed Monday.
The 1.4% monthly increase beat analysts’ expectations of a 1.3% gain in a Wall Street Journal survey. The monthly gain was a bounce back from the previous month’s 1.0% decline.
In annual terms, sales were 3.3% higher in July, the data showed, after June’s 5.2% gain.
Japanese Industrial Production Falls
Japanese industrial production fell 0.6% in July from the previous month, the Ministry of Economy, Trade and Industry said Monday, as the nation’s economy continues to follow a zigzag path amid global uncertainty.
July saw a mild rebound in Japanese retail sales and personal spending but a slowdown in exports, according to data released last week. The economy contracted 1.6% in the April-June quarter as a recent slowdown in China was felt in Japan.
The ministry said output is expected to rise 2.8% in August from July and then decrease 1.7% in September, based on surveys of companies.
Thai Economic Conditions Stay Weak Thailand’s economic conditions remained relatively weak in July, as most key indicators registered declines due to weak external and domestic demands.
On Monday, The Bank of Thailand said the private consumption index fell 2.1% from a year earlier in July, widening from a revised 0.1% on-year drop in June.
The index’s move “reflected consumers’ cautious spending as farm income contracted further on the back of lower farm output and prices and nonfarm households’ income remained flat on top of their concern over the economic recovery and development on the drought situation,” the central bank said in a statement.
Thailand’s private investment index inched up 0.5% from a year earlier in July, nearly unchanged from a revised 0.4% on-year rise in the previous month. (…)
Meanwhile, Thailand’s export contraction of 3.1% and import decline of 10.6% from a year earlier in July have led the country to a trade surplus of $2.7 billion and a current-account surplus of $2.1 billion.
Tourism continued to be a bright spot, as total arrivals rose 39.4% from a year earlier 2.64 million, the bank said.
India Grows Slower Than Estimated, Increasing Pressure on Modi
Gross domestic product rose 7 percent April-June from a year earlier, after a 7.5 percent expansion the previous quarter, the Central Statistics Office said in a statement in New Delhi on Monday. The median of 31 economist estimates in a Bloomberg survey was 7.4 percent.
SENTIMENT WATCH
Some Experts Brace for More Trouble
(…) Mr. Kotok worries that stocks could suffer another downdraft after the Federal Reserve’s Sept. 16 and 17 meeting if investors remain uncomfortable with interest-rate plans. He says he personally thinks the economy is strong enough for the Fed to raise rates in September and get it over with. Even if there is more volatility, he says, he is persuaded that low inflation, still-low interest rates and sustained economic growth will keep stocks out of a bear market, typically defined as a decline of 20% or more from a top. (…)
The fundamental problem, Mr. Ramsey says, is that markets became starved for fresh cash in 2014, after the Federal Reserve ended a program that spent $85 billion a month buying bonds. Much of that money had leaked into the stock market, pushing stock prices to what he considered unsustainable levels. By Mr. Ramsey’s measure, the S&P 500 still traded Friday at nearly 20 times its member-companies’ average annual earnings for the past five years, well above the indicator’s long-term median of 17 times earnings.
Without the Fed money and with multinational companies’ earnings hammered by a strong dollar and falling oil prices, it became harder for stocks to rise. Classic bear-market warnings started to flash. Mr. Ramsey saw weaker groups of stocks including transportation companies, utilities and industrial companies begin to slide, often a forerunner to trouble in the overall indexes. (…)
As evidence that more trouble is coming, he pointed to the breadth of selling during the recent declines, when few stocks served as refuges. That, he said, often is a signal that rallies will be temporary. (…)
Mr. Dickson has looked at every bear market back to 1929 and found that, in every case but two, stocks staged a strong rally after the initial declines, only to fall to new lows. Last week’s recovery “looks more like a rebound rally before a full-fledged bear market,” he said.
For him to change his mind, he said, he would need to see a bigger explosion in demand, pushing the S&P 500 back near record levels. (…)
Emerging-Market Stocks Head for Biggest Monthly Slide Since 2012
In Japan, Foreigners Fill Workforce Gaps Non-Japanese are taking a bigger role in powering Japan’s economy, as a labor shortage impels the nation to overcome its longstanding resistance to foreign workers.
(…) In 2014, there were some 788,000 legal foreign workers in Japan, up 15% over a two-year period to about 1.4% of the legal workforce, according to the Ministry of Labor. (…)
Japan has long seen itself as an ethnically homogeneous nation, despite the presence of Koreans and other foreigners, and talk of permitting large numbers of foreign workers tends to raise fears of crime or social unrest. Immigration is still a sensitive subject. (…)
Attitudes are changing at some of Japan’s big corporations as they attempt to become bigger players in the global market. Honda Motor Co. said this year that it would make English its official language by 2020, and companies such as Hitachi Ltd. have added non-Japanese executives to their boards.
A 2014 survey by recruiting firm Disco Inc. found 36% of companies hired or planned to hire foreign students in Japan, triple the figure four years earlier. (…)
The worst is yet to come. Bricklin Dwyer, a senior U.S. economist at BNP Paribas, estimates the major oil-field servicers have announced job cuts that will total 20,000 in the first quarter of 2015. The oil industry remains a tiny part of the U.S. employment picture, Mr. Dwyer notes, at about 0.7% of total employment. 
The next chart multiplies Real Average Hourly Earnings times the Average Hours Per Week for a snapshot of the trend in weekly wages. Real weekly earnings are up $7.34.
Lawrence Summers
John Gerspach, 