Federal Reserve officials are set to meet this weekend in scenic Jackson Hole, Wyo., with their plans thrown into doubt by massive volatility in the stock markets and ominous signals from overseas.
The central bank has been preparing for the better part of a year to raise interest rates, and in recent weeks, private-sector economists had become convinced that the Fed would finally do so at its September meeting in Washington.
Now the odds of that happening have fallen to well below 50 percent, according to probabilities calculated from bond prices by the CME Group. Outside analysts are calling for the Fed to ease money, even with a new round of bond purchases, or quantitative easing, if necessary.
Previous Jackson Hole conferences, hosted by the Kansas City regional bank, have served as an opportunity for the Fed to give notice of major changes it is contemplating. In 2012, then-Fed Chairman Ben Bernanke articulated the case for the large-scale bond-buying program now known as QE3.
This year, the topic of the conference will be “Inflation Dynamics and Monetary Policy.” The agenda for which central bankers from the U.S. and the world will speak will be released Thursday night.
Inflation has been a concern for the Fed, as it has been running well below its 2 percent goal and some signs have indicated that it may fall further.
But for now, the larger concern is that problems in China and dramatic volatility in U.S. stock markets might translate into slower growth.
Goldman Sachs economists wrote Wednesday that they “expect liftoff in December, and see the recent market sell-off as another argument against a hike in September.” They found that, in general, a 10 percent decline in stock prices led to a 0.15 decrease in the Fed’s target interest rate. The Dow Jones Industrial Average was down just under 10 percent over the past week before Wednesday’s bounceback.
Some prominent economists have gone so far as to suggest that the Fed should be easing, not tightening monetary policy.
“[W]e believe that there will be a big easing before a big tightening,” wrote Ray Dalio, founder of the hedge fund Bridgewater Associates, in a long LinkedIn post Wednesday.
Earlier during the week’s market turmoil, Larry Summers took to Twitter to warn that it “is far from clear that the next Fed move will be a tightening.” Summers, a Harvard professor and former economic adviser to Presidents Obama and Clinton, was thought to be Obama’s first choice for Fed chairman before liberals objected to him.
Under Chairwoman Janet Yellen, however, the Fed considers a range of economic data, not just stock market movements, in setting its course.
Speaking in New York Wednesday, Federal Reserve Bank of New York President William Dudley ruled out the possibility of a new round of quantitative easing, and stated that his preference was to raise rates in 2015, even if he was giving up on doing so in September.
Dudley added that stock market movements can affect real economic growth through what is known as the “wealth effect”: The dynamic in which people spend more freely when their personal wealth increases.
“The key issue is whether or not the recent decline in asset prices will bleed through into the broader economy,” Deutsche Bank economists wrote in a note responding to Dudley’s comments. The bank’s economists guessed that consumers’ balance sheets are strong enough to withstand a “modest” stock market drop without affecting their spending plans.
Dudley pointed to the consumer sentiment report to be published by the University of Michigan Friday as an indicator of how badly Americans have been shaken by the ups and downs of the markets in recent weeks.
In the meantime, however, the Fed will be well into a conference that was supposed to be about marking improvement in the economy and preparing to raise rates to a more normal level.
Yellen is not scheduled to speak, but Fed Vice Chairman Stanley Fischer will address the group and take questions Saturday morning. His comments will be closely scrutinized by investors for hints about just how bad the central bank thinks that the stock market losses are for the real economy.
