Fed update: Wrap up on Jackson Hole

Several FOMC members have voiced their opinions this weekend at the Jackson Hole Symposium. The most important was Vice Chair Stanley Fischer who participated in a panel discussion on Saturday on inflation dynamics and monetary policy.  

Fischer delivered a speech which was somewhat more hawkish than what we heard  from NY Fed President Dudley last week. Fisher acknowledged the improvement in the labour market, stating that the latest run of employment gains were "well above the amount needed to continue the strengthening of the labor market". At the same time, he noted that the FOMC was surprised that despite the large improvement in the labour market and the drop in the unemployment rate, core inflation had not trended higher over the past five years. This led him to note that "While much evidence points to at least some ongoing role for slack in helping to explain movements in inflation, this influence is typically estimated to be modest in magnitude, and can easily be masked by other factors".

Moving on to explaining what was the factor behind current low inflation rates, he sounded pretty confident that they were mostly transitory and that the bulk of the impact on inflation had already been felt. In particular, he mentioned the impact from the USD, lower oil prices and the decline in other commodity prices would likely peak this year. Given the stable (consumer) inflation expectations, the Vice Chair expected that when these transitory factors dissipate, inflation would move towards the 2% target, but noticing some risks to this view given the decline in market based inflation expectations.  

"In terms of when to hike rates, we see Fischer's comments as consistent with a Fed rate hike in December", says Danske Bank.

It seems that the Fed would like to get a little more confidence that inflation is moving in the right direction before hiking. However, it is also worth noticing that we do not need to see inflation rates anywhere near 2% before lift-off, as long as the trend in core inflation is not down. To sum up, George, Mester, Bullard and Lockhart are ready to hike either now or very soon. Kocherlakota wants to wait well into next year.