Investment Clock insights

Fed rethink?

Ian Kernohan

16 August 2016

A new paper by the President of the Federal Reserve Bank of San Francisco, John Williams, has fed into a discussion about a possible de facto or de jure increase in the US Federal Reserve's (Fed’s) inflation target from 2 per cent.  As recently as the end of July, Williams was musing on the need for two rate hikes this year: 

“There’s definitely a data stream that could come through in the next couple of months that I think would be supportive of two rate increases.” 

So what could have happened in the short period since to create such an apparent damascene conversion to lower for longer?  Certainly not the economic data, since his July comments came after the publication of the soft GDP report for Q2 and ahead of another strong payrolls report.  Can we now safely ignore any further pick up in labour market data including wages, safe in the knowledge that the Fed’s reaction function has undergone a fundamental shift in the space of a few weeks?

In reality, Williams is feeding into the Fed’s annual symposium in Jackson Hole, where central bankers have wide ranging discussions about the economy and policy options.  It certainty makes me more comfortable about my rate call of no pre-election hike, however to be sure that the Fed is now off the table for longer than just a few months, I would need to hear Yellen speak directly on this issue, stating that she was fundamentally rethinking the gradual Fed Funds hike message which she has been repeating all this year.   

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.