Off the Table-On the Table: the Fischerine Query

Jackson Hole Themes and the September FOMC Meeting: is the rate change on or off the table? MAS 8 31 15

It is hard to overemphasize how large the media focus is on predicting whether the FOMC will raise rates at its September. With that backdrop, surely observers at Jackson Hole gave rapt attention to the speech by the Board’s Vice Chairman, Stanley Fischer. Given his well-regarded academic achievements, his tours of duty at the IMF and the Bank of Israel, plus his sojourn at Citibank, outsiders regard his remarks as significant —potential containing clues as to the thinking at the FOMC. Perhaps, both hawks and doves in that birdcage listen more intently to a Fischer squawk than to others, while outsiders often refer to him as the “adult” at the table.
Clearly there was wide interest at any hints Fischer’s speech might produce regarding what the Committee is thinking and what it ought to think about in its rate-setting deliberations next month. The speech is a sober recital of the complexities of gauging where on the projection screen of employment and prices the US economy is at this moment. It is unlikely that it ignited any new conclusions. It was a temperate and thorough discussion on the difficulties of judging the future course of inflation, and how close the Fed might think it is in achieving its stated 2% objective. The speech also did not ignore the importance employment in evaluating the twin mandate, but it put a larger context around the usual focus on the unemployment rate by mentioning the status of older workers, part-time employment as well as the labor participation rate. His careful deliberation on the back of a tumultuous two weeks in equity and exchange rate markets all around the world underlies the Fed’s awareness that US rate changes affect other countries in the world economy.
Here is what we view as his important points regarding inflation.
focused on judging how close current inflation is to the 2% target while emphasizing that concerns should be on the forward path of the inflation rate.

pointed to how close to zero are the changes in the measured inflation rate despite the substantial oil shock.

Observed that the lack of upward changes in prices is only partly explained by issues of slack

Core inflation can be influenced somewhat by oil prices but the larger effect comes from dollar appreciation in terms of expectations and pass-through to GDP growth

Changes in dollar value: the estimated pass-through from import prices to consumer prices occurs relatively quickly within a quarter and the bulk of the overall effect occurs within one year

The effect of dollar appreciation with regard to GDP occurs over a longer time period, and …”it is plausible to think that the rise in the dollar over the past year would restrain growth of real GDP through 2016 and perhaps into 2017.

comment: Fischer doesn’t discuss why it is then if dollar appreciation works to slow GDP, shouldn’t we see that in the labor market? That is not happening so far.

The dynamics of inflation depend upon changes in expectations and expectations have been remarkably stable. Consequently, he sees stable inflation expectations as a dampening force in transmitting exchange rate changes to prices in the US economy.

The relevance of the above is that the FOMC has to assess progress—both realized and expected—toward its 2% objective. The Committee anticipates that it will be appropriate to raise the target range…when it has seen some further improvement in the labor market and it is reasonably confident that inflation will move back to its 2% objective over the medium term.

Fischer highlights the coming Employment Report due Sept 4, but the FOMC’s reaction won’t be a “mechanical one”

The FOMC will also be interested in unemployment of older workers, workers working only part-time for economic reason and the participation rate

Furthermore, FOMC will look prices in terms of the CORE inflation rate. (Here, the interest is whether the movements in the CORE rate give better forecasts of the future inflation rate)

The FOMC is also interested to decipher where the US economy is going, rather than where it has been. (It almost seems like he wishes to disconnect the FOMC from the revised 3.7% real growth rate of the Q2

At this point, the FOMC will also be looking at the effects of a target rate increase on economic activity outside of the USA.