Case for rate hike is now ‘less com­pelling’

The Myanmar Times - - International Business -

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.

Photo: EPA

Lael Brainard wants to post­pone in­creases in in­ter­est rates.

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