On Saturday, Fed Vice Chairman Stanley Fischer delivered a speech entitled “U.S. Inflation Developments” at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyoming. What can we learn from it?

The most anticipated event at this year’s Jackson Hole conference was Fischer’s speech as investors awaited some clues on interest rate hikes in the absence of Yellen at the symposium. However, the Fed still does not know what to do. If they knew, they would already be sending some signals. Instead, Fischer did not provide any detailed hints, focusing on the explanation of inflation dynamics. He brilliantly noticed that “inflation has been persistently below the 2 percent”, however, he argued that low inflation should be transitory (as it was caused by the decline in oil prices and the U.S. dollar appreciation).

Given the fact that monetary policy influences real activity with a substantial lag, the Fed should not wait until inflation is back to 2 percent to begin tightening, according to Fischer. This means that the September rate hike is still on the table, since the Fed seems to simply not care about inflation. On the other hand, many analysts believe that the Fed is unlikely to raise interest rates after recent developments in the global financial markets. In a CNBC interview, Fischer admitted himself that before the recent market volatility “there was a pretty strong case” for a rate hike in September, while the changes which began with the devaluation of the yuan are relatively new and the Fed is still watching how they unfold. A lot of depends also on the August employment survey, which is due to be published on September 4, since there must be some further improvement in the labor market to prompt the Fed to hike interest rates.

To sum up, Jackson Hole did not provide any clues on the interest rate hikes. The Fed simply does not know what to do and awaits the incoming data, especially the August payroll report. Sure, not hiking interest rates for nine years and making the decision depending on the data incoming in the next two weeks is ridiculous, however, this is a result of missing the proper time for interest rate hiking a few years ago. Anyway, unless the Fed postpones the decision or the August employment report comes in very weak, gold may come under downward pressure in the coming weeks, as investors assume that the U.S. central bank will indeed move in September.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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