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 Some top policymakers, including Fed Vice Chairman Stanley Fischer,
said recent volatility in global markets could quickly ease and
possibly pave the way for the U.S. rate hike, for which investors,
governments and central banks around the world are bracing.
With a key policy meeting set for Sept. 16-17, at least five Fed
officials spoke publicly in what amounted to a jockeying for
position on whether increasing the Fed's benchmark overnight lending
rate was too risky amid an economic slowdown in China, a rising U.S.
dollar <.DXY> and falling commodity prices <XAU=> <CMCU3>.
"It's early to tell," Fischer told CNBC on the sidelines of the
annual central banking conference in Jackson Hole, Wyoming. "We're
still watching how it unfolds." He, along with other Fed officials,
acknowledged that the global equities sell-off that began last week
would influence the timing of a rate hike, which until only a couple
of weeks ago seemed increasingly likely to occur in September.
Concerns about China's economy have whipsawed markets, including
Wall Street, even while U.S. economic data has been robust. U.S.
stock indexes ended largely unchanged, capping a week that included
both the market's worst day in four years and biggest two-day gain
since the 2007-2009 financial crisis.
"I think they could settle fairly quickly," said Fischer, a close
ally of Fed Chair Janet Yellen.
St. Louis Fed President James Bullard told Reuters he still favored
hiking rates next month, though he added that his colleagues would
be hesitant to do so if global markets continued to be volatile in
mid-September.
The Fed's policy committee "does not like to move right in the
middle of a global financial storm," Bullard, a Fed hawk, said in an
interview. "So one of the advantages we have is that this storm is
occurring now and, at least as of now, we think it will be settled
down" by the September meeting.
The comments suggest the next two and a half weeks will be critical
for the Fed as well as for global markets. A U.S. rate hike is
expected to hit emerging market equities and currencies particularly
hard, adding to the sell-offs already seen.
The American economy, however, continues to shine despite
longer-term concerns about low inflation.
The U.S. government reported this week that the economy grew at a
3.7 percent annualized pace in the second quarter, sharply higher
than its previous estimate, and that consumer spending, which
accounts for more than two-thirds of economic activity, rose again
in July.
'HANG OUT' AFTER A HIKE
Investors and economists have been betting the Fed would delay a
policy tightening to December or later, prolonging the monetary
stimulus that has kept rates at rock-bottom levels for more than six
years and has pumped trillions of dollars into the global banking
system.
But after Fischer spoke, traders added to bets that a rate hike
would come this year, with overnight indexed swap rates implying a
35 percent chance the Fed would move in September and a 77 percent
chance of a December move.
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Atlanta Fed President Dennis Lockhart, a centrist who has become
less resolute about a September rate hike as markets have tumbled,
told Bloomberg TV that it was reasonable to see the odds of a move
next month as roughly even.
One idea appearing to gain ground on Friday hinged on the Fed
raising rates once or twice and then holding off until inflation
started to rise to its 2 percent target. A strong dollar and lower
oil prices <CLc1> <LCOc1> have kept a lid on prices despite an
unemployment rate that is close to normal at 5.3 percent.
Bullard told Reuters the Fed could hike rates once then "hang out"
at that level if inflation remains too low.
Cleveland Fed President Loretta Mester, another so-called hawk who,
like Bullard, sometimes runs against the grain at the central bank,
said the economy still could handle a modest rate hike, though she
did not commit to backing a move next month.
"I want to take the time I have between now and the September
meeting to evaluate all the economic information that's come in,
including recent volatility in markets and the reasons behind that,"
she was quoted as saying by the Wall Street Journal.
The Fed decision has drawn unusually intense interest from both
foreign central bankers, who will have to respond, and from
Americans on both the right and left.
The conservative American Principles Project held speeches at a
nearby hotel urging a prompt rate hike. Meanwhile, a floor below the
main Federal Reserve conference space, the Center for Popular
Democracy hosted workers and economists calling on the Fed to keep
rates low to get more Americans back to work.
The Fed needs to re-think "full employment in a way that recognizes
the high joblessness of black and Latino communities," Sarita Turner
of PolicyLink told about 60 advocates, noting that U.S. joblessness
among blacks is twice that of whites.
Minneapolis Fed President Narayana Kocherlakota, a dove who wants to
stand pat on rates until the second half of 2016, said in an
interview China's slowdown heightens the risk of a U.S. shock.
"There's just no reason to go now," he said.
(Additional reporting by Jason Lange and Krista Hughes in
Washington; Editing by Paul Simao and James Dalgleish)
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