Every year the US Federal Reserve holds its annual monetary policy conference at Jackson Hole, Wyoming. The conference is attended by all of the Federal Reserve governors as well as many central bankers from around the world. As usual, markets hang off every word that is uttered as they attempt to read through the nuanced language, known as ‘central banker speak’, and try to decipher where interest rates are heading.
As YieldReport readers will know, it’s all about the Fed. US interest rates drive global rates and so the utterances take on over-sized significance although as former Fed chief Alan Greenspan once famously said “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant”
This year the Fed has been attempting to let markets know that further interest rate rises are coming. Growth in the US has been reasonable and unemployment is at acceptable levels (some even say at close to full employment) but the difficulty in raising rates is that the Fed does not want to squash nascent growth with higher rates nor does it want a super-strong currency that might also crimp growth.
It is a delicate balancing act. And within the Fed there are the ‘hawks’ and the ‘doves’ that each feel the need to make public comment that only obfuscates the picture about the Fed’s intentions. At stake is the growth of the world’s largest economy. For academics and others there is also the added interest about how markets can wean themselves off the quantitative easing drug.
On Friday, US time, Janet Yellen, the chair of the Fed told the conference that “the case for a higher Federal Funds rate (ed: equivalent to our cash rate) has strengthened in recent months.”
This is about as direct as central bankers get. It was followed up by a statement from Fed vice chairman Stanley Fisher who said “the chair’s comments are consistent with a possible hike in September.” So take heed. Rate hikes in the US are likely upon us.