Case for rate hike is now ‘less compelling’
THE case for raising US interest rates remains less than convincing, given weak inflation and current under-employment levels, influential Federal Reserve Board Governor Lael Brainard said.
The remarks come a week before US policymakers are due to review interest rate policy, with markets in uncertainty as to whether the Fed will resume a course of rate hikes it had embarked on in December.
“To the extent that the effect on inflation of further gradual tightening in labour market conditions is likely to be moderate and gradual, the case to tighten policy preemptively is less compelling,” Ms Brainard said in remarks at the Chicago Council on Global Affairs.
Ms Brainard has been a voice for postponing increases in interest rates in favour of allowing job creation.
Her remarks stood in sharp contrast to more hawkish members of the Federal Open Markets Committee who say they fear inflation and an overheating economy. The FOMC was divided in June on the timing of the next rate increase.
Dennis Lockhart, president of the Atlanta Federal Reserve Bank, said policymakers were due for a “lively discussion” when they meet next week, but he did not pronounce on likely actions by the Fed this year.
Ms Brainard said the conventional link between inflation and unemployment had not held as labour markets had strengthened over the past four years against the odds.
“At a time when the unemployment rate has fallen from 8.2 percent to 4.9pc, inflation has undershot our 2pc target now for 51 straight months,” she said.
She said the current unemployment rate had not budged despite steady job growth of an average of about 180,000 new positions per month, suggesting that labour markets still had significant slack.
International conditions also argued in favour of caution, said Ms Brainard, noting that weak growth and low inflation in Europe and Japan as well as instability in China could impinge on the US economy.
“Recent experience suggests global financial markets are tightly integrated, such that disturbances emanating from Chinese or euro-area financial markets quickly spill over to US financial markets,” she said.
Yields in the US Treasury’s 10-year bond auction rose amid expectations of an increase in interest rates.
The Treasury sold US$20 billion in 10-year bonds at a high yield of 1.7pc, up from 1.5pc a month ago.
Nearly 32pc of the issue went out at the high yield. The bid-to-cover ratio was 2.35, with direct bidders taking up 3.39pc of the issue and indirect bidders getting 62.11pc.
Treasury bond and note yields at auction and on the secondary market have pushed higher as Fed officials voice their confidence in slow but steady US economic growth.
The Fed meets on September 20 and 21 to review monetary policy.
Lael Brainard wants to postpone increases in interest rates.