It Depends On The Data Says The Fed…

J.Yellen

This is what the Fed deputy chairman Fisher told us last Tuesday. Any future decision on interest rates will depend, in the end, on the data. But he did not specify exactly what data.

Under normal conditions, it would be the figures related to growth and inflation. These are the two main objectives in the strict sense of the US monetary policy. But the current situation is not normal. And the different members of the Fed who are making daily comments to the media confirm this.

The probability of a rate hike in September is now over 50% according to market expectations. And it’s a given for December, after the US Presidential Elections. Is that too late? I find it interesting how some Fed members are warning that there is very little room for maneouvre as far as traditional monetary policy goes in the near future, in the event this was necessary.

Raise rates to be able to lower them in the future? In the past, there have been average rate cuts of 400 basis points to  tackle recessions. At the moment, assuming two additional rate hikes in the coming months (the market is discounting levels of 1%), there would be scant margin for cutting them in the future if needed.

But of course there will always be margin in non-traditional monetary measures. And those up to now also considered exceptional measures: asset purchases and forward guidance (Yellen has explicitly rejected negative interest rates). Funnily enough, there is a Fed report which draws a similar conclusion, when Coeure’s speech at Jackson Hole last weekend also suggested this possibility in the future, taking into account the greater role of non-bank financing now (shadow banking and wholesale banking) in the economy.

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months.” Yellen.

Septiembre? Or December? The reality is that the impact of a rate hike on the financial markets could even be positive. And I am referring to the certainty and confidence behind this decision that the US economic recovery will continue. And also confidence regarding international financial stability itself. After more than eight months of witnessing this, it is a fact that the international context is another “indicator” that the Fed takes into consideration for its decisions.

A few days ago, Fisher said the dollar’s performance was also part of the evaluation.  At the end of the day, too many factors to consider which complicates the decision-making process. And I have to admit that the ambiguity that we have also all seen may create more uncertainty for the financial markets. And  financial stability remains a priority…don’t you agree?

http://www.federalreserve.gov/econresdata/feds/2016/files/2016068pap.pdf

Within a context of only marginal rate hikes up to now, monetary policy is less efficient. What is needed then? Fed chair Yellen has also recently mentioned that there are structural factors which limited this efficiency…referring to factors which limit investment and productivity. As a result, the cyclical economic recovery has been less intense and the pressure on inflation less. But can an expansionary monetary policy tackle structural problems? Although in my opinion, the question is something else: what are the risks of too lax a monetary policy over too long a period of time? In terms of the financial sector, some of these are obvious. Others, in terms of excesses, can in theory be redirected via prudent macro and micro measures. While admitting that they may be unknown, we can only consider that the rest don’t exist. But in my view, its the first and last kind which are most to be feared.

The market was awaiting the US August jobs data, due out on last Friday. This was the key indicator anticipating a September rate hike. They said that more than 150,000 new jobs will be a sufficient trigger for the Fed to take its decision this month. Finally, nonfarm payrolls reached 151,000. And the necessary condition? That the rest of the data, whatever it is,  is along the same lines.

*Image: US Government