US interest rates are going nowhere fast despite upbeat news at home
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Version 0 of 1. Central bankers have their own lingo. They tend to speak in tortured prose that obscures more than it illuminates. Given the choice, they favour a gnomic utterance over plain speaking. Bill Dudley, the president of the New York Federal Reserve and the second most important US central banker after Janet Yellen, has just provided a masterclass in central bank-speak. Asked what the latest turbulence in the financial markets meant, Dudley replied that recent economic data had been “pretty positive”. He added, however, that from his perspective the case for the Fed to start “the normalisation process” - translation: raising interest rates - was “less compelling” than it was a few weeks ago. This is the sort of utterance that used to get Harry Truman hopping mad. The former US president once said that he longed for a one-handed economist, so fed up was he with his advisers saying that on the one hand it looked like this, while on the other hand it looked like that. In truth, for a central banker Dudley was being perfectly clear. As a member of the US central bank’s rate-setting committee he will not be voting for the cost of borrowing to go up at the Fed’s meeting in September, and it is reasonable to assume that Yellen will not be either. The chances of a rate increase next month are not completely dead in the water, but they are receding by the day. Dudley has been one of the more hawkish members of the Fed’s interest rate-setting committee, but he is now having second thoughts. That’s not because there is any immediate prospect of the US economy collapsing. The data released while the markets have been nosediving this week has, as Dudley says, been “pretty positive”. The news on consumer confidence, the property market and investment was all relatively upbeat. There are, however, other arguments that are likely to persuade the Fed to stay its hand. The recent economic data has pointed to a solid recovery rather than a boom. Unemployment has come down, but there is little evidence of wage inflation. US consumers are more exposed to the stock market than their British and other European counterparts, so any plunge in share prices affects spending because people feel poorer. The so-called wealth effect is one reason Alan Greenspan’s reflex response to trouble on Wall Street was to cut interest rates. Yellen is unable to cut interest rates because they are already so low. With the exception of the early 1980s, however, when Paul Volcker was intent on crushing inflation whatever the cost, the Fed’s instinct since the Great Depression of the 1930s has been to avoid action that risks pushing the economy into recession. Expect Yellen to continue this tradition. The fall in the global oil price is a double-edged sword for the US. The boost to consumer spending power will be offset by the fact that Brent crude at $43 (£28) a barrel makes US shale production uneconomic. The oil price is caught in a pincer movement. Demand from China is going down, while the nuclear deal with Iran means supply is poised to go up. What’s more, the price of copper – historically a good indicator of turning points in the global economy – is signalling a marked slowdown. A US interest rate rise has been a long time coming. The last time the Fed pushed up the cost of borrowing was in 2006, so it can hardly be accused of being trigger happy. Having waited this long, however, it is going to conclude that there is no harm done in waiting a little longer. The same applies to the Bank of England, even though there has been recent radio silence from the nine members of the monetary policy committee during the August holiday period. Those people rushing to take out fixed-rate mortgages because they think Threadneedle Street is about to tighten policy have plenty of time to secure the best deal, because it is not going to happen this year. Indeed, there is more chance that the European Central Bank and the Bank of Japan will provide extra stimulus through their quantitative easing programmes than there is of the Fed or the Old Lady raising rates. |