What once seemed a sure bet — that the Federal Reserve would raise interest rates in September — suddenly appears less certain after a wild week of stock market turbulence.
The market’s ride and how the Fed will react provide the backdrop for the annual high-profile economic conference sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo.
Fed chair Janet Yellen decided to skip this year’s meeting, so vice chair Stanley Fischer is commanding top attention, with investors eagerly parsing his every word.
Fischer’s message: Incoming economic data and market developments over the next two weeks will play crucial roles in determining whether the Fed raises interest rates at its September meeting.
In an interview Friday with CNBC, Fischer acknowledged that before the recent market volatility, “there was a pretty strong case” for a rate increase at the Sept. 16-17 meeting, though it wasn’t conclusive. Now the jury is out because the Fed needs to assess the economic impact of events in China and on Wall Street.
But Fischer said Fed officials realized that they needed to act before data require them to raise rates to alleviate inflation.
“When the case is overwhelming, if you wait that long, you will be waiting too long,” Fischer said. “There is always uncertainty, and we will just have to recognize that.”
Fischer tried to reassure markets, as Yellen has, that when the Fed begins to raise rates, it plans to do so very gradually. The Fed’s key rate has been at a range of zero to a quarter point since late December 2008.
Indeed, Friday was a generally calm day in the stock market.
The Dow Jones industrial average fell 11.76, or 0.1 percent, to 16,643.01. The Standard & Poor’s 500 index rose 1.21, or 0.1 percent, to 1,988.87. The Nasdaq composite rose 15.62, or 0.3 percent, to 4,828.32.
Fischer said the first move on interest rates would nudge them up by a quarter point to a range of 0.25 percent to 0.5 percent. He said with that small increase, rates will still be historically low, continuing to provide support to consumer and business borrowers.
“We will be adjusting the knob slightly,” he said.
Fischer said his “confidence is pretty high” that low inflation will head toward the Fed’s target of 2 percent as temporary effects from a big drop in energy prices fade. A government report Friday showed that the Fed’s preferred measure of inflation is up just 1.2 percent over the past 12 months. It has been below 2 percent for the past three years.
Fischer will deliver more comments on inflation in a formal speech to the conference Saturday.
Other Fed officials who have spoken since the market turmoil hit have hinted at a delay. But they haven’t ruled out an increase in mid-September.
William Dudley, president of the New York Federal Reserve, helped ignite a Wall Street rally this week when he told reporters that the case for raising rates in September was “less compelling to me” than it had been a few weeks ago, before sudden fears about China’s economy upset global markets.
But Dudley added that the notion of a rate increase “could become more compelling by the time of the meeting as we get additional information” about the economy.
Esther George, president of the Kansas City Federal Reserve, said she was taking a “wait and see” approach.
“We’ve seen data that suggests the economy is strong enough to act,” George told Fox Business Network. “So we’ll see what happens by the September meeting.”
George, who doesn’t have a vote on the Fed’s policy committee this year under the committee’s rotating system, has long argued that the Fed must soon begin raising rates to avoid instability in the markets. She is among officials known as “hawks,” who tend to worry that rates kept too low for too long could escalate inflation or fuel asset bubbles.
So far, the hawks have remained in the minority, outnumbered by the Fed’s “doves,” including Yellen. They typically stress the need to keep job growth strong and to raise inflation closer to the Fed’s target.