Pondering What A Fischer Departure Means For Fed Policy
“It’s too soon to judge exactly the timing of when the next rate hike might occur, but the path is still clear that short term rates are going to move higher,” said New York Fed Chairman William Dudley on Friday noting that while above-trend US economic growth and “very easy” financial conditions suggest the need to hike, the fact that inflation has fallen “further below our target than we anticipated” suggests the Fed can afford to wait. Of course, it remains to be seen whether the 3-month extension to the US government debt limit will elicit tighter financial conditions as the US Treasury reverts to debt issuance rather than drawing down on cash balances held at the Fed. But perhaps the interesting aspect of Dudley’s comments is that he does remain wedded to further hikes.
That matters because markets now also have to try and factor in what the resignation of Fed Vice-Chair Stanley Fischer, effective on or around October 13, will mean for US interest rate policy. The Dutch firm Rabobank feels “the probability of a third [US] rate hike has fallen now that Vice-Chairman Stanley Fischer is resigning before the November and December meetings” as Rabo perceives Fischer as “less dovish than Fed Chair Janet Yellen” and potentially “more willing to hike despite disappointing inflation figures.” Japan’s MUFG Securities thinks that “one might have thought that the exit of [Fischer] this giant of the inflation targeting establishment including its inclination to favour wild monetary experimentation for the purpose of economic stimulus might have been greeted with a rise of the dollar and fall of gold.” The fact that it didn’t, the Japanese firm argues, suggests that “quite simply markets are giving up or already have given up entirely on expecting US monetary normalization in any real sense.” But there’s arguably little point, for those trading in the foreign exchange market, to worry about what Fischer might or might not have done if he had stayed. It’s arguably more important to focus on what those who are staying are saying. And in Fischer’s absence that arguably means traders may pay even more attention to what Dudley says.
Written by Neal Kimberley, External Currency Analyst.