The US interest-rate rise conundrum continues

It was only yesterday that I analysed the risk that the European Central Bank eases monetary policy again. In essence it boils down to the level of the Euro with a soupcon of oil price influence. But there is quite a list of central banks considering easing policy further to join the 60 or so moves we have seen so far in 2015. However the major central bank which is the US Federal Reserve wants us to believe that it will raise interest-rates under its policy of Forward Guidance and wants us to forget the couple of false starts on that front that 2015 has already seen!

Over the past week or so we have had a veritable smorgasboard of views from Federal Reserve voting members from a definite yes (Esther George) to a hint of further easing and hence no (Kochlerkota). The majority view is this from Vice-ChairMAN Stanley Fischer in his speech at Jackson Hole.

With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.

The tenet of his speech is that inflation is on the way back to 2% with the implied view that interest-rates need to rise soon in response. That is what we are supposed to think.

Currency Wars

I note that Mr.Fischer also steers us towards this in his speech.

The rise in the dollar since last summer, of about 17 percent in nominal terms, with its associated declines in non-oil import prices, could plausibly be holding down core inflation quite noticeably this year.

This is a monetary tightening although with the US Dollar being the reserve currency with the majority of commodities priced in it there is a smaller influence than say the UK. I note he also points us to an economic model which suggests the impact will not last long.

Finally, PCE inflation shows a sizeable but transient drop due to declining import prices.

The United States is traditionally not that concerned about the impact of its monetary policy on others but the flip side of the appreciation discussed has been seen just this morning. From Darlington Dick.


The so-called emerging market currencies are getting what the Duke of Wellington called a “damned hard pounding” and if we return to the originators of the Currency Wars theme then even an Olympics and a football World Cup are being cast aside. From Bloomberg.

Brazil’s real led losses among major currencies and fell to a new 12-year low……..The currency declined for a fourth straight day, falling 1.7 percent to 3.7611 per dollar, the weakest level since 2002.

Poor Brazil has been alternately frozen (the original Currency Wars complaint) and then heated up by the changes in perceived US monetary policy, like a football really.

The International Monetary Fund

This seems to get ever more concerned about a rise in US interest-rates as its latest statement makes clear.

Advanced economies should maintain supportive policies. In most advanced economies substantial output gaps and below-target inflation suggest that the monetary stance must stay accommodative.

Does it mean the US? Well the specific section carries on the theme.

In the United States, growth in the first half of the year was 1.8 percent, compared to 3.8 percent in the 2nd half of 2014. The growth slowdown reflected harsh winter weather, port closures, and a strong downsizing of capital expenditure in the oil sector in Q1, and relatively sluggish business investment in Q2. Recent revisions in the U.S. national accounts suggest that productivity growth during 2012-14 was lower than previously thought.

What about going forwards?

Longer-term growth prospects are weaker, reflecting an aging population and low total factor productivity growth.

Indeed the IMF goes so far as to drop quite a hint.

with little evidence of meaningful wage and price pressures so far,

It also mimics the “Warning,Warning” of the robot Robbie in the Swiss Family Robinson films.

Risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook.

There is also a hint as it turns out in the location of the G-20 meeting which is Ankara where US delegates will find that there US Dollar expenses will go much further than they did.

The Beige Book

This is where the various regional Federal Reserves take a look at the economy in their area and the latest version was released last night. So what do we learn?

Six Districts cited moderate growth while New York, Philadelphia, Atlanta, Kansas City, and Dallas reported modest increases in activity. The Cleveland District noted only slight growth since the last report. In most cases, these recent results represented a continuation of the overall pace reported in the July Beige Book.

So good news but hardly signs of a boom and whilst some see it in the labour market section I am less convinced.

Most Districts reported modest to moderate growth in labor demand, although Boston, Cleveland, and Dallas cited only slight increases in hiring. This tightening of labor markets was said to be pushing wages up slightly in selected industries or occupations, especially in the New York, Cleveland, St. Louis, and San Francisco Districts.

If there is a boom this is in a familiar area.

Reports on residential and commercial real estate markets across the Districts were mostly positive. Existing home sales and residential leasing widely improved, with home prices moving up in most areas.

This backs up a theme from the CoreLogic numbers released yesterday as well.

On a month-over-month basis, home prices increased by 1.7 percent in July compared to June data…..Home prices, including distressed sales, increased 6.9 percent in July 2015 compared to July 2014. June marks the 41st consecutive month of year-over-year home price gains.

A central bank rasing interest-rates to slow house price growth? I will believe that when I see it! After all they are presented as wealth gains and not inflation in modern central banking theory. Also on a technical note the US uses rents and not prices in its CPI (Consumer inflation) measure. It is one of the factors holding it up with primary rents rising at just under 3.6% and maybe set for a rise.


Tomorrow sees the US employment and non-farm payrolls report for August. Regularly we see moves which are statistically insignificant considered as policy moving events! In case you were wondering the Bureau of Labor Statistics estimates that for July the statistically significant change was 107,400. Rather gives a perspective to a 10k or 20k difference to expectations doesn’t it? That is before the fact that the two different surveys often give conflicting answers.

However the US Federal Reserve persists with the mantra that an interest-rate rise is on its way. In itself a 0.25% increase is not much of a change but that ignores how tightly wired the world financial system and economy remains. So the song for September 17th is from Daniel Bedingfield.

If only I could get through this
If only I could get through this
If only I could get through this
God, God gotta help me get through this

Perhaps the Federal Reserve could play it as background music. although surely they must fear what might happen if they raise and therefore will delay yet again. If so perhaps the song should be from Green Day.

Summer has come and passed
The innocent can never last
Wake me up when September ends


7 thoughts on “The US interest-rate rise conundrum continues

  1. Hi Shaun

    The amount of space given to analyzing what the Fed says (or does not say!) never ceases to amaze me. If you step back just a little and consider the fear of what will happen if IRs are increased by 0.25% it is quite amazing. I realize that this is billed as the start of a process but no one thinks that we are headed to 12% rates at the end of this. We are in a situation that is so fragile it cannot stand even a small tightening?

    Alan Greenspan(!) mentioned the other day that for millenia a reasonable rate of interest has been 4-5% and we have has zero for seven years. If this is the case then this answers your question; if we are hand wringing over 0.25% then not only can we not increase them but we are in a big hole and this is indeed the case!

    I think the only time the Fed will raise rates is when they are forced to. The US economy is soft and getting softer and to tighten in those circumstances is madness and the Fed knows this. Indeed if the PBOC and others continue to sell US TBonds I can see not only no rise in IRs but a resumption of QE. It won’t work of course but that is irrelevant.

    • Hi Bob J. I have been thinking the same. There’s seventeen 0.25% increases between 0.25% and 4.5%; Greenspan’s ‘normal’ rate. If we spend this long waiting for each subsequent move we might return to his ‘reasonable’ rate by 2134; that’s assuming no black swan events in the meantime!

      • Maybe that’s why Greenspan was talking in millennial terms.

        Bob J: I have been saying this, or something very like it, for some time & little, if anything has changed during that time

  2. Great column, Shaun, as usual. You bring back a lot of memories.
    The robot Robbie was a fixture of “Lost in Space” was he not, also known as “Space Family Robinson”?. I was an addict of that show but I could never figure out how geniuses like Professor Robinson and Dr. Smith couldn’t figure out how to get off the planet while yokels like the space hillbillies could come and go at will.
    The people running the US Fed seem to be singing along to the chorus of Quebec musician Sylvie Paquette’s song “Oser”: “J’aurais dû oser / Jamais su oser” (I should have dared / Never knew to dare). I couldn’t find it on You Tube but here’s another song by the same artist:

    UK music shops probably aren’t well-stocked with French-Canadian albums, but the song “Oser” was on Mme Paquette’s second album, also called “Oser”.

    • Hi Andrew and thank you

      The number of record shops has thinned out enormously in the UK in the last decade or so as music has gone online. Although there has been a niche revival in vinyl and LP sales. I do not know if French-Canadian music is available but these days you get get virtually anything. I think it is the first time it has got a mention on here!

      As to the US Fed so far their indecision has been final.

  3. Hi Shaun
    I believe she will go through with the increase. The latest service sector PMIs give her the fig-leaf of rationale ( if she needs it).
    The US has inflated its credit enormously since 2008 , directed mainly to fracking, cars and education ( with health to a lesser extent). It has to start pulling back.
    Its also reached the point where ‘confidence’ would be hit more by not increasing rates.
    The psychological effect of a rise will be felt much more ex-US than internally where ‘future guidance’ has already resulted in firming up of many commercial rates.

    • Hi JW

      I was on Share Radio’s lunchtime show today and I suggested that rather than all this Forward Guidance and dithering it would have been much better to simply do it in an “old fashioned” manner. Markets would have been upset for a bit and then adjusted. After all it is only 0.25% as earlier comments have pointed out.

      Mario Draghi was interesting on the subject in his press conference today as when asked he said he would support a Fed rate rise if it helped it hit its inflation target. Just as he was hinting at an ease to help hit his! So an implied shot across the bows, meaning the G-20 might see some disputes.

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