Last week Federal Reserve chair Janet Yellen tried to convince financial markets in her speech at the Fed’s annual Jackson Hole get-together that an interest rate increase at the central bank’s September 21 meeting was still a possibility. But just as the market has brushed off earlier similar comments from the heads of the Atlanta and San Francisco Federal Reserve Banks, this week has opened with financial markets saying in essence No way. The Fed won’t raise interest rates, financial markets are convinced, before the November election and it won’t raise interest rates with the Bank of Japan and the European Central Bank still committed to more stimulus.
Talk from the Fed of a September increase–no matter how strong the August jobs report is on Friday–is just talk, markets continue to maintain. (Economists expect that the economy created 180,000 net new jobs in August. That would still be a strong performance if below the 255,000 jobs created in July.)
Today, August 29, the Standard & Poor’s 500 climbed 0.52% to 2180.38. (Oil fell with West Texas Intermediate off 1.41% to $46.97 a barrel. The decline was enough to put an end to the oil bull market that started on August 18.)
Longer range talk at the Jackson Hole meeting veered in two radically different directions.
Some heavy hitters, including Charles Sims (a Nobel-prize-winner in economics in 2011,) warned that central banks, including the Fed, have made a critical policy mistake by insisting that monetary tools alone are sufficient to tackle the current paucity of economic growth. It’s beyond time, these critics say, for national governments to put fiscal policy to work on increasing growth.
Other speakers focused on signs that the current period of negative real interest rates–in the United States the Fed Funds rate is 0.25% to 0.5% with inflation running at 1.6%–and negative nominal (that is before considering the impact of inflation) interest rates in Europe and Japan is likely to be with us for a long, long time. Research from the San Francisco Fed, presented at the conference, argued that the Fed Funds rate would be just 1% in 2026. At the Fed’s normal pace of 25 basis points per move that would mean just two or three interest rate increases not in 2016 and 2017 but over the next decade.
For today, at least, the financial markets have focused on the positive news (from a market perspective) of a likely pass on September 21 on any interest rate increase and projections of a very long period with very low interest rates not much higher than they are today.
The disquieting warnings about the difficulty of tackling current problems of very low economic growth don’t seem to have made it onto the market’s worry list as August comes to a close.
