Hawks at Jackson Hole

August 31st, 2015 4:54 am | by John Jansen |

Last evening I posted a Jon Hilsenrath story which commented that the main outcome of the Jackson Hole confab was a market perception that the FOMC was still on target to raise rates in September. FOMC members are largely nonplussed by China’s woes and recent market market gyrations. The FT reinforces that theme this  morning with some commentary from UBS and DeutscheBank.

Via the FT:

Space suits back on, everyone. It looks like September, while not nailed on, is back in play for a US rate hike.

The market’s implied probability of a rate rise in September (and yes, September starts tomorrow) is now back up at 38 per cent, from 30 per cent at the close of play on Thursday, writes Katie Martin.

The reason for the rethink: Jackson Hole.

The get-together of central bankers broadly speaking gave the impression that the Fed needs talking out of moving in September, not talking into it.

The Chinese market meltdown has been concerning, but the guessing now seems to be it’s not necessarily by itself concerning enough to put the kibosh on a hike. It’s not too hard to imagine a rosy jobs report on Friday tipping this over the edge.

The main Fed speaker was vice-chair Stanley Fischer, who got most of the meatier comments out on Friday.

Jackson Hole is all in Central Banker Speak, so naturally, it’s not clear cut. But here’s what some Fed watchers make of it.

Says UBS’s Beat Siegenthaler:

Fischer’s Jackson Hole appearances have seemed designed to push back on investor complacency which might have crept in particularly following NY Fed President Dudley’s comments about the case for a Sep hike being ‘less compelling’. Fischer’s comments may thus well have had the objective of keeping the Fed’s options open, including for September.

There may be an increasing concern about a potential loss of credibility should the Fed be seen as shying away from lift-off too easily. In fact, one of the problems may currently be that the Fed has manoeuvred itself into a bit of a corner by insisting on data-dependency while at the same time giving calendar guidance by talking about lift-off before year-end. Hence one hypothesis has been that the Fed might be keen to hike rates at least once over the next three months or so in order to avoid being seen as eternally on the fence.

I retain my view that the dollar seems unlikely to have much more upside given existing positioning coupled with arguably little prospect of material Fed tightening. Risk aversion on the other hand could easily be sparked once again as investors remain very nervous amid a confusing global growth outlook.

Deutsche Bank’s Jim Reid:

Without pinning down any specific hints on timing but still leaving the September liftoff door open, Fischer’s tone certainly felt like it weighed on the more hawkish side, saying that the Fed should not wait until it meets its inflation goal while voicing confidence that prices should head higher.

More hawkish commentary came in the form of non-voters Mester and Bullard. Mester in particular said that ‘my view so far in looking at all of the factors is that the economy can sustain an increase in interest rates’, while Bullard signaled that the volatility of the last 10 days would not be enough to change his view that the US economy can sustain a rate rise. The lone voice in the dovish camp on Friday, Kocherlakota, said that ‘I don’t see a near term increase in interest rates as being appropriate, and by near-term I mean really through the course of 2015’. Meanwhile Lockhart, speaking once again, commented that timing for liftoff ‘is close’ but that it’s an ‘open question’ whether the Fed moves now or waits a little, noting that the October FOMC is a ‘live meeting’ and ‘in play’.

So with all the comments, the probability of a September move by the Fed has now jumped.

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