China Swoon Sharpens Jackson Hole Focus on Feeble Inflation

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Timing is everything. Central bankers gather in Jackson Hole, Wyoming, this week for an academic discussion on inflation just as China’s slowdown spooks global markets and renews fears of falling prices.

The Kansas City Federal Reserve hosts policy makers and leading economists from around the world on Friday and Saturday at its invitation-only annual retreat in the Teton mountains.

The theme is inflation and monetary policy, and expectations are high that the highest-ranking Fed official at the conference, Vice Chairman Stanley Fischer, will shed light on the timing of Fed interest rate increases. Chair Janet Yellen has said she isn’t attending this year’s conference.

The backdrop, aside from the lofty scenery, will be the puzzling case of wages and prices in the U.S. and why they haven’t responded more to a near halving of the unemployment rate in less than six years. Should recent market turmoil subside, that may be the only thing holding the Fed back from a rate liftoff in September.

New York Fed President William Dudley on Wednesday raised the possibility that market developments might make a September rate increase less likely.

Add to that concerns among policy makers worldwide over a plunge in commodity prices that has revived the specter of global deflation. That’s also fanned speculation the European Central Bank may step up efforts to stimulate euro-zone growth. ECB President Mario Draghi will also not attend.

“Inflation will be front and center,” said Michael Feroli, chief economist at JPMorgan Chase & Co. in New York. “It’s a concern not only for the central bank here, but in the euro zone and in some Asian economies as well.”

Full Employment

The U.S. jobless rate has dropped to 5.3 percent, close to the Fed’s estimate of full employment, making it difficult for the U.S. central bank to justify keeping its benchmark rate near zero, where it’s been since 2008.

Still, the Fed’s preferred gauge of inflation has remained under its 2 percent goal since April 2012. More mysteriously, wages also haven’t budged. Average hourly earnings rose 2.1 percent in the 12 months through July, exactly the same pace as a year earlier.

“The basic laws of supply and demand matter,” said Athanasios Orphanides, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a former senior adviser at the Fed. “You have to expect prices to move upward if you have tightness in a market. The question is, how does that translate to the real economy?”

The lack of a clear answer is making it harder for Fed officials to decide when to pull the trigger on a rate increase. They’ve said for months they won’t raise rates until they are “reasonably confident” that inflation will move back toward the 2 percent target in the medium term.

Fed Meeting

The Fed next meets to review policy on Sept. 16-17. Investors have cut the probability of a move at that gathering to 28 percent Tuesday from 48 percent on Aug. 18 based on trading in fed funds futures. Yellen has previously said the central bank is likely to raise rates this year if the economy grows as expected.

Investors bet she will delay in the face of market turbulence sparked by China’s slowdown. The country announced the devaluation of the yuan earlier this month to help prop up growth but investors remain concerned the world’s second-largest economy may be weakening more than anticipated.

Dudley, speaking at a press briefing in New York, said the case for a liftoff in September has been weakened by international market turmoil, but cautioned it’s important not to overreact to short-term developments.

“From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” Dudley said.

Lowered Expectations

The absence of Yellen and Draghi has lowered expectations for a major policy announcements at Jackson Hole.

That will increase the scrutiny of any remarks from Fischer. He’s scheduled to appear Saturday on a panel with Bank of England Governor Mark Carney, ECB Vice President Vitor Constancio, and Bank of India Governor Raghuram Rajan.

“It depends where he places emphasis” in any comments about inflation, Mark Zandi, chief economist at Moody’s Analytics Inc. in New York, said of Fischer. “If he says oil and the dollar are more transitory and we should focus on the strength of the labor market, that might be a signal they feel comfortable about raising rates.”

Fischer said in an Aug. 10 interview he expected prices to move gradually upward, while adding that temporary headwinds restraining inflation were still a concern for the Fed.

“You probably want to get a richer sense of the factors that give them confidence in inflation getting back to 2 percent,” JPMorgan’s Feroli said.

Maury Harris, chief U.S, economist at UBS Securities LLC in New York, said he also expects Fischer to share his thoughts on recent market turmoil.

“He has to somehow address this, perhaps say markets are just volatile and they can’t let that undermine monetary policy,” Harris said.

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