The turmoil in China has intensified the debate within a divided US Federal Reserve over whether the inflation outlook will be strong enough to justify higher interest rates as soon as next month, as policymakers around the world struggle to get to grips with the clouded outlook for the People’s Republic.
Events in China have badly shaken faith in the country’s economic management among officials attending the meetings in Jackson Hole, hosted by the Kansas City Fed, as well as exposing the uncertainty among western policymakers about the genuine health of China’s economy.
Nowhere is the debate on the repercussions more immediate and significant than within the Fed, which faces a pivotal policy meeting next month.
On Saturday Stanley Fischer, the Fed’s vice-chairman, acknowledged the central bank is looking at China and its impact on other economies “even more closely than usual” but insisted there was still “good reason” that US inflation would head to the central bank’s 2 per cent target.
Some members of the Federal Open Market Committee appear to have become more unsure about the outlook, however. Last week William Dudley, the head of the New York Fed, said the reasons for lift-off had become less compelling because of events in China.
Cautious
Narayana Kocherlakota, the dovish president of the Federal Reserve Bank of Minneapolis, said that new downside risks to the global outlook were “another argument to be very cautious about removing accommodation and potentially to consider adding accommodation”.
By contrast, James Bullard, the president of the St Louis Federal Reserve, said: “I think the assessment will probably be that the outlook has not changed that much for the US economy, the market turbulence didn’t develop into something more dangerous, and so we can probably just go ahead with our existing strategy.”
Arguments for a September hike are being supported by strong domestic growth figures – with the US economy expanding 3.7 per cent in the second quarter – and optimism about the jobs market, with critical numbers due on Friday.
Central bankers emerged from meetings over the weekend with conflicting views over the effect of the China-induced market turmoil, with some leading figures downplaying the threat to their own economies even as others emphasised new risks facing the world economy.
Change
Attending the meetings in Jackson Hole, Mark Carney, the Bank of England governor, said developments in China were unlikely to change the UK Monetary Policy Committee’s plans for “limited and gradual” interest-rate increases.
However, western policymakers are still struggling to figure out how significant the weakness in China will prove to be – in part because of the opacity of the country’s data and complexity of its decision-making processes. A presentation by David Li, a professor at Tsinghua University with close links to Chinese officials, was well attended by central bankers on Friday, anxious for better insights into the gravity of the slowdown within the People’s Republic.
“For the people who were concerned about the forces of deflation, those clouds have darkened with China, and the question is whether it’s going to be a drizzle or a storm,” said Randall Kroszner, a professor of economics at the Chicago Booth School and a former Fed governor.
“I haven’t seen evidence that China is over the cliff, but the violent market movements suggest we don’t know. And that’s partly because of the lack of transparency in the Chinese data.”– Copyright The Financial Times Limited 2015
