Janet Yellen, chair of the US Federal Reserve, along with other key policy makers in the US, has been at Jackson Hole, the location for an annual symposium, where central bankers chew fat, cogitate, and sometimes say something significant. This time around a credibility problem seems to be emerging, but the news does seem to be good.
If you have kids, you must know that you have to follow through with your threats. If they are mistreating one of their toys, and you say ‘stop that, or I will take your toy away’ it’s no good if they carry on as before and you then do precisely nothing. It is like that with central bankers, too. If they keep threatening to increase interest rates but then don’t, after a while the markets, just like unruly children, stop taking their elders seriously.
Last year the Fed was making noises about increasing interest rates. They were increased in December, and the markets, basing their views on what the Fed kept saying, pencilled in three rates hikes for 2016.
Well it hasn’t happened.
So all eyes turned to Jackson Hole, a rather stunning looking valley in Wyoming, where the great and the good among US central bankers gather.
Speaking from the ‘Hole’ this weekend, Ms Yellen said that US growth “has been sufficient to generate further improvement in the labour market”, and “the case for an increase in the federal funds rate has strengthened.”
You might have thought that such a beautiful location would inspire central bankers to be a touch more poetic in their speeches. Instead, we are left with the usual decoding, trying to interpret the raising of an eyebrow, comparing it with the previous time Ms Yellen spoke at the Hole, did her eyebrow move in that way then?
Ms Yellen’s number two, Stanley Fisher – Fed, vice-chair – has been a lot more obvious, making all kinds of noises about increasing interest rates, and saying that a rate hike at the next meeting of the Federal Open Market Committee (that’s the Fed’s rate setting committee) on September 21 was possible.
Some are saying that this all means that we will see two rate hikes from the Fed during what is left of 2016.
Others are just not so sure. The general consensus seems to be that if US rates do go up this year, it may well not be until December.
But Ms Yellen did talk about something called the ‘terminal’ rate. This refers to the level at which US interest rates may peak, in this cycle. Hitherto, it had been thought that the terminal rate is likely to be 3%. After Janet spoke, and talked about such things as abundant global savings, she left watchers with the distinct view that when rates do finally peak at some point this decade, it is more likely to be around 2% rather than three.
So on the one hand, the Fed seems to be saying rates will rise soon, on the other hand, it is saying they will not rise that far – not in this cycle, anyway.
What do we make of that? On the whole, this is good news for the pound and emerging markets.
Sharp rises in US rates could have had negative consequences for emerging markets with high levels of debt exposure. Many feared a repeat of 1997, when money flowed out of the Asian tiger economies into the US, creating a massive crisis in Asia. Frankly, with one or two exceptions, emerging markets’ exposure is nothing like it was in the mid-1990s. Even so, the news that the terminal level of US rates is likely to be lower than previously thought will surely be greeted well.
As for the UK, if US rates go shooting up, while UK rates stay as they are, or are even cut, then in theory the pound will fall very sharply. The odds of this happening seem to be looking quite remote.