No doubt, we learned a little bit more than usual from Fed Chair Ms. Yellen’s speech at Jackson Hole that reads: “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. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook … as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course ... the range of reasonably likely outcomes for the federal funds rate is quite wide--a point illustrated by figure 1 in your handout.”
When we take a look at the interesting chart Ms. Yellen refers to, the fed funds rates that include 2018, range from nearly 0.0 percent to about 4.5 percent, which simply means the Fed itself doesn’t have the slightest idea where the rates will be.
For the near term, Friday’s employment situation figures will be important and could give us (hopefully) a somewhat better idea on when the Fed’s first rate move could be expected. Anyway, the implied probability of a September Fed hike is now 42 percent.
It might also be somewhat helpful for investors who want to prepare themselves for what could be coming, which doesn’t mean will be coming, on the Fed’s rate front, to take a look at what some FOMC voters have said on Friday after the Fed Chair had given her speech:
- Vice Chair Stanley Fischer (FOMC voter) said: “I think what (Yellen) said today was consistent with answering yes to both of your questions (on whether markets should be ready for a rate hike in September or even this year), but these are not things we know until we see the data.”
- St. Louis Fed president James Bullard (FOMC voter) said: “If we had a lot of good news and we got into the September meeting and other people wanted to go, I could support that, but again I'm talking about one increase and no planned increases after that.”
- Kansas City Fed president (FOMC voter) Esther George said: “I do think it is time to move that rate.”
- Cleveland Fed President Loretta Mester (FOMC voter) said: “I see a gradual upward pace in interest rates as being appropriate. That doesn't mean we are behind the curve now but I do think that it makes sense to be starting to move interest rates up on that gradual path.”
- Fed Governor Jerome Powell (FOMC voter) said: “When we see progress toward 2 percent inflation and a tightening in the labor market and growth strong enough to support all that, we should take the opportunity.”
All this underlines the fact that the Fed will, unless something very unexpected occurs, start raising rates very soon. The speed at which that will occur remains an open question.
In context of all that, investors could do well not to overlook the fact that world trade volume still isn’t growing.
The just released CPB World Trade Monitor for June 2016 shows that world trade volume momentum was again negative at -0.8 percent in June while the import and export side, both showed a negative number.
Besides that, over the weekend, Germany’s Vice Chancellor who is also Germany's economy minister Sigmar Gabriel said that: U.S.-EU free trade talks that are known as the talks on the Transatlantic Trade and Investment Partnership (TTIP) have failed, which can’t be helpful for stimulating global trade growth.
Please keep in mind that U.S. GDP is made up of about 80 percent by U.S. consumption.
In clear language, all this means that monetary policies of the United States from one side and from the other side, the Euro area, which by the way will have its inflation data on Wednesday but that will remain too low, the UK, Japan, and others are set to diverge further, which will make the Fed’s normalization process difficult, but not impossible.
Fed Chair Ms. Yellen’s task will not be easy, that's for sure, and about what she said in her speech, which was important as well as pivotal from an historical standpoint, no doubt about that, makes me think at what Greenspan said in 2007: “I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.”
Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.
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