Key Takeaways from Jackson Hole

   
When asked on Friday what will happen in September, VC Fischer responded with:
 
“We are still watching how it unfolds… I wouldn’t want to go ahead and decide right now what the case is, compelling or less compelling” for rate rises. 
 
He also commented during separate interviews on Saturday:
 
“I will not, and indeed, cannot, tell you what decision the Fed will reach by September 17th.”
 
“We haven’t made a decsion yet and I don’t think we should make a decision” until considering all the information available.  
 
So what did we learn from this weekend’s Jackson Hole gathering? 
 
A September FOMC Rate Increase Is Still On the Table
Last week’s market gyrations did little to alter FOMC members’ expectations for the US economic growth and inflation.  With little change to their outlook, the Fed appears to be open to the possibility of a rate increase as early as September.  No doubt FOMC members will be paying close attention to this Friday’s non-farm payrolls report for the latest developments in U.S. employment. 
 
Since changes to monetary policy are known to act with a lag of one to three quarters rather than instantly, policy makers often look to economic forecasts when considering whether or not to take policy action today.   Presidents Bullard and Mester both commented how their outlook for strong growth and employment remains unchanged despite the recent volatility in financial markets.
 
Even Vice-Chair Fischer noted that he still expects inflation to strengthen:  
 
“There is good reason to believe that inflation will move higher as the forces holding inflation down – oil prices and import prices – dissipate further.”
 
 
Market Turbulence Has Yet to Reveal Underlying Structural Weaknesses
While it is unlikely the price adjustments in equities, FX and other asset markets are completely over, the financial system seems to have held up well under stress so far.  This gives policy makers some assurance they can move forward with removing accommodative monetary policy without creating fissures in financial stability. 
 
Considering the size and volatility of price moves last week, markets seemed to handle the gyrations well and trading remained orderly for the most part.  Unlike the recent financial crisis, there was little sense of panic, vanishing liquidity or contagion.  Importantly, there was little evidence of major strains at financial institutions or exchanges as margins were called, payments made and trading continued. 
 
 
China Remains a Wild Card in the Global Economic Outlook
Although there is not likely to be immediate impact on US monetary policy, the sharp economic slowdown in China will be a focus of attention for Fed policymakers going forward.  The Chinese economy has been a strong and steady source of economic growth since the financial crisis and its slowdown – as well as the response by Chinese authorities - is already rippling through commodities, FX and other markets. 
 
Two big questions remain with regard to China going forward: 
 
First, how sharply is the Chinese economy slowing down?   
 
Second, what can (and will) Chinese authorities do about this? 
 
As the answers to these questions unfold, they will have implications for global growth and inflation.  Policy makers in all countries will be paying attention to this situation as it plays out. 

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