The new stock market storm and the slowdown of the Asian economy are displacing the forecasts of the Federal Reserve. Eric Rosengren, chairman of the Boston Fed, expressed caution: "Indications of a weaker global economy increase uncertainty about the Fed governors' estimates of economic growth and inflation", he said in a speech held in New York. This could affect how the Fed decides to hike rates. Rosengren did not leak any preference on the timing of a tightening, but explained that the Fed's outlook "must take into account recent developments, including data suggesting a slowdown in foreign economies coupled with volatile stock prices and to the decline in those of raw materials”, two factors, the latter, which indicate “a weaker global economy”. Troubles abroad, he continued, "may suggest a downward revision of estimates that is large enough to raise concerns about a likely deterioration in labor markets."
This factor raises questions about when the Fed will be able to hit its 2% inflation target. For Rosengren, moving a tightening “by a couple of months” has limited impact, as demonstrated by “macroeconomic models of the economy”. Even for him, it's the pace at which rates return to growth that is more important than when they start to rise.
In essence, Rosengren argues that the slowdown in economies, led by China, may force the central bank to revise growth estimates and inflation forecasts downwards: the exact opposite of the assessments made by Stanley Fischer, the bank's number two, in Jackson Hole. In this context with a high degree of confusion, the expectation for Mario Draghi's words is growing, at the end of tomorrow's ECB directorate.
