Viktor Nossek, director of research at ETF provider WisdomTree Europe, has commented on Janet Yellen’s speech at Jackson Hole, announcing that the case for an interest rate hike in the US has strengthened.
Nossek says: “Jackson Hole has done nothing to trigger a rate hike in the US. While Janet Yellen has said the case for an increase in the federal funds rate has ‘strengthened’, demand-led data spurring inflation – which has been one of the causes of the delay to further hikes – continues to be soft and tepid, and therefore there is little reason for the Fed to act in September.
“There is no longer robust economic growth or population growth to support tighter monetary policy action in the West and this increases the stakes when it comes to plotting the route back to normalisation through setting higher rates of inflation and interest rates. Indeed with policy rates so low, the weak growth figure – which today was revised down to 1.1 per cent for Q2 – means the downside risk of hiking too early is simply too great.
“What needs to change to prompt a hike? The missing driver for sustainable inflation is labour market tightening and that hasn’t happened because wage growth – at 2.6 per cent year on year – is still falling short of the levels seen prior to the financial crisis when it was well above 3 per cent year on year. Until the labour market in the US turns red-hot, the risk of inflation weakening following a rate hike would put the Fed in the difficult position of having to fight it with less room for policy easing. It is therefore better to delay and risk high inflation that leads to subsequent further rate hikes than pre-emptively trying to contain current price pressures that so far have posed little to no risk to the US economy.
“With Kuroda, the head of the Bank of Japan, also present, the meeting at Jackson Hole concluded with one important lesson from Japan: It is easier to fight inflation than it is to fight deflation.”