Fed to give warning on rates rise
The US Federal Reserve will provide greater details about the normalisation of monetary policy well before interest rates rise, according to the minutes of its July meeting. Members of the Federal Open Market Committee were generally supportive of proposals outlined by Fed staffers for implementing and communicating monetary policy once the Committee begins to tighten the stance of policy. "Participants agreed that the Committee should provide additional information to the public regarding the details of normalisation well before most participants anticipate the first steps in reducing policy accommodation to become appropriate," said the FOMC minutes. The FOMC minutes "stressed the importance of communicating a clear plan while at the same time noting the importance of maintaining flexibility so that adjustments to the normalisation approach could be made as the situation changed and in light of experience." While Wednesday’s release of the minutes are important, they are backwards looking. Analysts are keen to hear what Fed chairwoman Janet Yellen will be saying on Friday at the monetary policy conference in Jackson Hole, Wyoming. Ms Yellen is scheduled to talk about the labour markets, a crucial indicator of when the Fed could begin raising interest rates. The July meeting minutes revealed policy makers believed the labour market had improved at a faster than anticipated rate over the past year. But they remained concerned about "still-elevated levels of long term unemployment and workers employed part time for economic reasons as well as low labour force participation." Policy makers differed in their assessments of the remaining degree of labour market slack and how to measure that factor. The minutes noted: "Many participants continued to see a larger gap between current labour market conditions and those consistent with their assessments of normal levels of labour utilisation than indicated by the difference between the unemployment rate and estimates of its longer-run normal level." The minutes also suggested that policy makers anticipate a slow rise in price pressures noting: "several participants continued to believe that inflation was likely to move back to the Committee’s objective very slowly, thereby warranting a continuation of highly accommodative policy as long as projected inflation remained below 2 per cent and longer-term inflation expectations were well anchored." But the impressive annualised 4 per cent growth rate for the economy during the second quarter has had some economists arguing for the Fed raising rates sooner. At the last Fed meeting, Philadelphia Fed president Charles Plosser was the first to dissent on keeping rates low, arguing that there had been "considerable economic progress". July marked the sixth straight month of the US adding more than 200,000 jobs, but the solid rate of growth had slowed from June and didn’t reflect the kind of rapid pace of improvement that would’ve put pressure on the Fed. Wage growth also remained stagnant, which has disappointed policy makers. European Central Bank President Mario Draghi is also scheduled to speak at Jackson Hole. Investors will be keeping an eye out for any mention of the possibility of a US-like quantitative easing policy, which has been debated in Europe but so far, the ECB has declined to pursue. The Fed also reduced its monthly asset purchases at last month’s meeting from $35bn to $25bn – in line with its intention to end purchases under quantitative easing altogether in October.