Markets decline as Fed officials give hawkish comments on raising in rates

Dow fell 49 (but above the lows), decliners over advancers 3-2 & NAZ went up 7.  The MLP index inched up pennies above 310 & the REIT index lost 3+ to the 358s.  Junk bond funds clawed their way higher & Treasuries were sold, taking the yield on the 10 year Treasury above 1.6%.  Oil & gold hardly moved in price.

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Crude Oil Oct 16

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Janet Yellen raised the possibility that future policy makers might increase their inflation target & broaden the types of assets they can buy to enhance their ability to counteract a severe recession.  While stressing that the central bank was “not actively considering” such steps, she told a Fed symposium that “they are important subjects for research.”  She said monetary policy makers currently have sufficient tools to handle economic downturns “under most conditions.”  Those tools include asset purchases & forward guidance in which the central bank promises to keep interest rates low.  “That said, these tools are not a panacea, and future policy makers could find that they are not adequate to deal with deep and prolonged economic downturns,” she added.  A major factor behind the need for a potential rethink: the low level of the neutral interest rate, the short-term rate which neither stokes nor slows economic growth.  Yellen said some calculations indicate that it’s now close to zero in inflation-adjusted terms.  “It could remain at this low level if we were to continue to see slow productivity growth and high global saving,” she added.

A low neutral rate constrains how high the Fed can lift rates without harming the economy & thus gives it less room to cut them in a downturn.  The Fed adopted a 2% inflation target in Jan 2012 & except for a brief period that year, it has fallen short of achieving that goal.

Yellen Imagines a Future Where Fed Tinkers With Inflation Target

If the U.S. economy continues on the same path, a “serious discussion” about raising interest rates will be warranted at the FOMC's Sep meeting, according to Atlanta Federal Reserve pres Dennis Lockhart.  “Well, let me give you my sense of the economy very quickly. My sense of the economy is that the GDP number we saw for Q2 really is not the total story.  If you look within that number you see the effect of inventories.  And if you exclude that, you look at real, final sales, you see a more encouraging picture, a picture of a kind of steady, moderate growth economy.  Not impressive but nonetheless steady,” Lockhart said.  “If I see by the run-up to the FOMC meeting data that are kind of consistent with that picture, my position is we ought to have a serious discussion. That doesn’t mean necessarily even I am going to support it, but it deserves a serious discussion,” he said.  When asked specifically if the Fed is likely to move on rates this year, Lockhart said “[it] would be appropriate, providing we see the continuing pace of growth and the continuing progress toward our objectives.”

Fed's Lockhart on a Sept. Rate Hike: Deserves Serious Discussion

More members of the Federal Reserve are favoring an interest rate hike possibly as early as Sep even though US economic growth remains persistently anemic.  GDP rose just 1.1%, revised down from 1.2%, in the latest read on Q2.  Still the vibe coming from the Fed's annual symposium in Jackson Hole is that the Fed is ready to raise rates perhaps as soon as September.  Yesterday, Kansas City Fed pres Esther George said that in the interest of long run sustainable growth, rates should rise gradually. Ester is on the same page as NY Fed President Bill Dudley who has said that the US economy will be stronger in the coming months. 

Fed Officials Brush Off Weak GDP, Ready to Hike

Vice Chair Stanley Fischer said the decision on whether to hike interest rates should be looking forward, not backward — and the next jobs report will figure into the process.  The US economy has strengthened, with strong jobs data in the last 3 months, Fischer added.  "That will probably weigh in our decision, along with other data that may come in," he said.  "The problem with this economy is there is so many numbers each day," Fischer said.  "You have to try and figure out what is the main thrust of what's going on in the economy."  "You can always find a set of data that will enable you to build a different case," he continued.  "That's the hard part."  He also addressed one of the problems in the economy, productivity growth.  "We haven't seen much [positive] change. In fact, we've seen it going the other way.  The number of hikes this year depends on the data, he said, reiterating the Fed's standard line.  But he did say Yellen's comments were consistent with the possibility of as many as 2 rate hikes this year.

Fed's Fischer: Economy is stronger, next jobs report a key for hike decision

Traders are getting nervous about an interest rate hike.  Dow sank to down 100 today on those worries, but recovered much of the loss in late day trading.  The thought of a rate hike will be troubling for the stock market, especially when it remains essentially at record highs.  There is a lot for investors to think about over the weekend.

Dow Jones Industrials