US Federal Reserve still expected to raise interest rates

China’s stuttering economy might come more strongly into view from the Rocky Mountains at this week’s Jackson Hole meeting of central bankers following the chaos in the stock markets.

Many economists still expect the Federal Reserve to stay the course and start raising interest rates this year.

Despite the wild see-sawing of US stocks after China’s “Black Monday” meltdown, the bet is on the central bank to move soon and start weaning the US off rates that have stayed near zero since 2008.

The annual policy conference in the Grand Teton National Park in Wyoming, starting onon Thursday, has traditionally been a forum for chin-stroking academic ruminations.

Despite the 6,000ft altitude, there has been plenty of hot air at the symposium since it moved to Jackson Hole in 1982, four years after its inception.

In more recent times, Fed chairmen Alan Greenspan and Ben Bernanke used the mountain retreat to signal major policy shifts.

Fed chairman Janet Yellen is not travelling to Jackson Hole this year but markets will be following closely what vice-chairman Stanley Fischer has to say at the symposium and how the recent market collapse will figure in discussions.

Economists say there is a strong chance the Fed’s policy-making committee would raise rates for the first time since 2006 when it meets in mid-September. Minutes of the committee’s July meeting, released last week, said the right conditions for a rate increase “were approaching.”

Employment numbers

There is still plenty of data to come before the September meeting – economic figures on Thursday and employment numbers next week – that the Fed will peruse. The decision to raise rates will rest on whether labour market conditions are still improving and whether the Fed is confident inflation is heading towards the target rate of 2 per cent.

Employment growth has picked up and the creation of, on average, 240,000 new jobs every month for two years has left the unemployment rate at a healthy 5.3 per cent. A drop in commodity prices in the recent market upheaval though will raise concerns about inflation slowing and likely raise talk at Jackson Hole on whether a risk of global deflation from sliding prices might spread to parts of the US economy.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, appeared unmoved in a speech delivered on Monday as that day’s topsy-turvy market session closed: “I expect the normalisation of monetary policy – that is, interest rates – to begin sometime this year.”

‘Serious error’

Others are not so sure. The IMF has warned raising rates could increase pressure on emerging economies, while economist Larry Summers, a former adviser to President Barack Obama, wrote in an opinion article in Monday’s

Financial Times

that a rate increase in the near future would be “a serious error” in the current conditions.

Gus Faucher, a senior economist at PNC Financial Services Group, says the market turmoil makes increasing rates next month “a tougher call” but there are many reasons why the Fed could comfortably do so.

“If I were betting I would still say that it is slightly more likely to be September than December,” he said.

Mark Vitner, an economist at Wells Fargo bank, said a rate increase in September was “not off the table” given that the Fed’s comfort level with the global situation will then be in a far different place from now.

“We have got a lot that is moving in the right direction here,” Mr Vitner said.

“The Fed is absolutely right when they say that conditions are no longer consistent with zero interest rates. The challenge for them is finding an opportune time to begin to raise them.”