Fed watchers see upcoming jobs report and inflation data as key after Warsh signaled a willingness to hike interest rates
New York Fed President John Williams is the one regional Fed president who votes at every Fed interest-rate committee meeting.
New York Fed President John Williams, who has been a leading advocate of the central bank's "hold and wait" strategy on interest rates, sounded more open to an interest-rate increase in a television appearance Wednesday.
"There's no clear science right now, whether monetary policy currently ... is sufficient to make sure we bring inflation back to target in the next year or two, or whether we need to see further action to do that," Williams said on CNBC.
Williams added that the recent data showing inflation was slowing have been pointing to the view that policy was in the right place, but added that he and his colleagues "can't just look at a month or two; we've got to look at all the different pieces of information we have."
This is a subtle shift. When he last spoke publicly in August, Williams said interest rates were "well positioned" to bring inflation back to the Fed's 2% target.
"Williams is opening options," Tim Duy, chief U.S. economist at SGH Macro Advisors, said in an email.
Last week, in Jackson Hole, Wyo., Fed Chairman Kevin Warsh was much more open about his views on the economy than he'd been previously and said he would back raising rates if appropriate.
"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said.
Without promising a hike, Warsh told investors to "watch this space," Raghuram Rajan, the former governor of the Reserve Bank of India, who attended the Jackson Hole meeting, said in an interview on CNBC last week.
Earlier this year, traders were expecting rate cuts this year, but are now bracing for potential Fed rate hikes. The derivatives market is signaling a rate hike is likely at the September meeting, raising the probability to 64% from 36% before Warsh spoke at Jackson Hole.
That doesn't mean everyone has been convinced that higher rates would help tame inflation.
"Tankers are getting hit in Hormuz and crude is up double digits over the past month," Vincent Ahn, portfolio manager at SLW Investments, told MarketWatch Wednesday. "No level of the funds rate reopens a shipping lane," he added. "A supply shock raises prices and cuts growth at the same time, and a rate hike answers the first problem by punishing the second. That is a bad trade."
Brent Crude oil prices (BRN00) topped $94 a barrel this week, a more than 50% year-over-year jump, according to FactSet. The Iran war, now in its seventh month, has been intensifying with President Donald Trump this week vowing to escalate attacks. Back in the U.S., households have been grappling with gas prices still above $4 a gallon nationally.
Fed officials will meet on Sept. 15-16 to set interest-rate policy. The central bankers have kept interest rates unchanged in the range of 3.5%-3.75% at the first five meetings of the year.
The August job report, set to be released Friday, and the month's inflation data, due next week, could have a big impact on the Fed's decision in two weeks.
Fed governor Christopher Waller, whose views are closely tracked by Wall Street, will speak on Thursday morning.
"My take is that Friday [job report] matters more than Wyoming did," said Ahn at SLW Investments, referencing Warsh's Jackson Hole speech and the coming jobs report. "Payrolls went negative in July and wage growth has been cooling for a year," Ahn said, noting that he will be watching details such as hours worked, how many sectors are adding jobs and revisions to past months' data as much as the headline figure on Friday.
The government often revises past months' data markedly, which can impact how economists read the report.
"The bar for hiking into negative payrolls is higher than the market thinks."
In his interview on CNBC, Williams called the labor market "solid" and "stable."
-Greg Robb