The Federal Reserve’s No. 2 official said there is “good reason” to think sluggish US inflation will firm up and move back toward the central bank’s 2% annual target, touching on a significant assessment facing the Fed ahead of its September meeting.
Vice Chairman Stanley Fischer told participants at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyo., that inflation likely will rise to the central bank’s annual target of 2%. This is despite low oil and import prices which are keeping prices of everything else lower.
“Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding inflation down – oil prices and import prices, particularly – dissipate further,” Fischer said.
Many, including my colleague Stuart Burns, wrote that it would be unlikely for the Fed to pursue rate hikes, at least in the short term, after China’s stock market collapse. The head of the Fed’s New York branch, William Dudley, even said that the argument for a rate rise in September had diminished; markets took Fischer’s comments as relatively bullish, especially compared to Dudley’s.
Fischer’s comments seem to indicate that the Fed could raise rates as early as its September meeting.
In an interview last week with CNBC, Fischer said that before the recent turbulence in global financial markets, “there was a pretty strong case” for a rate hike at the September 16-17 meeting, though it wasn’t conclusive. “The Fed’s made it perfectly clear that the first rate hike doesn’t mean there will be a second or a third within three to six months – we just need to get our first one out of the way.”
What This Means for Metal Buyers
If that first rate hike does come in September, then we could expect lower prices for many of the metals we track. Higher interest rates tend to lead to supply increases in storable commodities such as aluminum and copper; they make it more appealing for miners to pull ore out of the ground today instead of tomorrow.
They also goad speculators into moving out of spot commodity contracts and into something with a better yield.