Despite a 10% stock market crash after China’s currency devaluation, key central bankers are unlikely to alter the schedule for interest rate hikes. Stanley Fischer from the Federal Reserve and Mark Carney from the Bank of England gave cautiously optimistic speeches at an economics summit in Jackson Hole, Wyoming, quelling investor fears about an economic collapse in China.
Both the Federal Reserve and the Bank of England are planning to tighten monetary policy in the near future. Meanwhile, economic slowdowns in emerging markets have prompted a wave of “easy money” policies as a means of boosting growth, creating a slight paradox for investors.
Which will matter more? The monetary stimulus from emerging market central banks? Or the policy tightening in advanced countries?
The most telling cue came at a closed-door meeting of the world’s top economists. Every year, the powerbrokers of international finance gather in Jackson Hole, Wyoming to discuss challenges facing the global economy.
Two speeches at the conference are getting quite a bit of attention; one from BoE Governor Mark Carney and another from Federal Reserve Governor Stanley Fischer. (Source: CNBC, August 29, 2015.)
Carney: China Devaluation Won’t Prevent Rate Hike
Although he’s now the head of England’s central bank, Carney is actually a Canadian that once ran the Bank of Canada. Before that he was a senior executive at Goldman Sachs, meaning this guy understands how the market thinks.
In fact, he’s so well respected that other central bankers elected him to run the Financial Stability Board at the Bank of International Settlements. That’s about the best testimonial you can get as an economist.
Carney laid out the big picture in pretty broad strokes, but it’s very illuminating.
“The start of normalisation is set against determined easing of policy in the euro area and Japan as well as now across many Emerging Market Economies including China,” he said. (Source: Bank of England website, August 29, 2015.)
Normalization is just econ-speak for getting interest rates rebound from crisis lows, ending all asset purchases, and staying hands-off with the economy. They want central banks to fade back into the shadows of financial news, to fall from the front page to page six.
Carney also addressed the issue of China. “It should be recognised that the direct exposure of the U.K. economy to China is relatively modest,” he said. “In this regard, developments in China are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert.”
Believe it or not, that was an astonishingly direct response to a very important question. Central bankers are notoriously vague, but a plain text reading of Carney’s statement helps me believe that a rate hike for England can still be expected early next year.
Fischer: Rate Hike Will Come Before We See Two Percent Inflation
Stanley Fischer has previously been the head of Israel’s central bank and Chief Economist of the World Bank, making him one of the most qualified central bankers of all time. He’s also been a close ally of Chairwoman Janet Yellen.
After saying the Fed is paying close attention to the effects of China’s currency devaluation, Fischer moved onto the commodity rout.
Both precious metals and crude oil suffered huge losses in the past 12 months, and when viewed in tandem with a strong U.S. dollar, these signs could explain low inflation in the near term.
But Fischer doesn’t think that situation will hold for much longer.
“Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” said Fischer.
“Because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to two percent to begin tightening.” (Source: Federal Reserve website, August 29, 2015.)
The job of central bankers is to forecast and see what we don’t; to look at the tectonic forces of the economy and decide what move comes next. Fischer’s comments imply that the Federal Reserve’s commitment to raise rates this year won’t be shaken by a week of financial market volatility. According to him, the next move is to hold steady.