Global down­turn spurred Fed to chang­ing rate path

The Pak Banker - - COMPANIES/BOSS -

Fed­eral Re­serve pol­i­cy­mak­ers wor­ried last month that a global slow­down and fi­nan­cial mar­ket sell­off could hurt the U.S. econ­omy and con­sid­ered chang­ing the cen­tral bank's planned in­ter­est rate hike path for 2016.

Al­though most of the pol­i­cy­mak­ers still ex­pected to raise rates this year and even dis­cussed a hike at the Jan. 26-27 pol­icy meet­ing, they were di­vided over how to in­ter­pret the fi­nan­cial mar­ket volatil­ity, ac­cord­ing to the min­utes from the meet­ing re­leased on Thurs­day.

That sug­gested the Fed was back­ing away from the four rate hikes that were sig­naled for this year in De­cem­ber, when it hiked rates for the first time in nearly a decade. The pol­i­cy­mak­ers dis­cussed "al­ter­ing their ear­lier views of the ap­pro­pri­ate path for the tar­get range for the fed­eral funds rate," but most judged it "pre­ma­ture" to make big changes to their out­look, ac­cord­ing to the min­utes.

They added that they would closely mon­i­tor global eco­nomic de­vel­op­ments as well as oil and stock prices.

"A num­ber of par­tic­i­pants were con­cerned about the po­ten­tial drag on the U.S. econ­omy from the broader ef­fects of a greater-than-ex­pected slow­down in China and other (emerg­ing mar­ket economies)," ac­cord­ing to the min­utes.

Wall Street's skep­ti­cism that the Fed would raise rates at all this year in­creased af­ter the re­lease of the min­utes.

Prices for fed funds fu­tures im­plied in­vestors saw a roughly 30 per­cent chance of a hike in De­cem­ber and less than that at prior meet­ings, ac­cord­ing to CME Group. Bets on a De­cem­ber hike were about 40 per­cent be­fore the min­utes were re­leased.

A num­ber of Fed pol­i­cy­mak­ers said the re­cent moves in fi­nan­cial mar­kets "were dif­fi­cult to rec­on­cile" with signs of un­der­ly­ing U.S. eco­nomic strength. But many of them saw grow­ing risks to the econ­omy and some said the fi­nan­cial mar­ket stress may be "roughly equiv­a­lent" to fur­ther mon­e­tary pol­icy tight­en­ing, which would re­duce the need for rate in­creases.

Af­ter a lengthy dis­cus­sion of global eco­nomic risks, they agreed that eco­nomic un­cer­tainty had in­creased and wor­ried about the im­pact of per­sis­tent tur­moil in fi­nan­cial mar­kets. "If the re­cent tight­en­ing of global fi­nan­cial con­di­tions was sus­tained, it could be a fac­tor am­plify­ing down­side risks" to the econ­omy, ac­cord­ing to the min­utes. Global fi­nan­cial mar­kets have re­mained volatile since the Fed's Jan­uary meet­ing. Mex­ico, one of the top U.S. trad­ing part­ners, raised in­ter­est rates on Wed­nes­day to counter a weak­en­ing of the peso against the dol­lar. In the min­utes, pol­i­cy­mak­ers noted that China's prob­lems could weigh on both Mex­ico and Canada, an­other top U.S. trad­ing part­ner.

Oil prices were still in freefall when the pol­icy-set­ting Fed­eral Open Mar­ket Com­mit­tee met last month, but on Wed­nes­day they rose as much 7 per­cent af­ter Iran voiced sup­port for a Rus­si­aSaudi-led move to limit crude pro­duc­tion.

Data from the Fed on Wed­nes­day show­ing a strong jump in U.S. in­dus­trial out­put in Jan­uary also bol­stered the U.S. growth out­look.

Prices of U.S. Trea­suries pared losses af­ter the re­lease of the min­utes, while the dol­lar weak­ened against the yen. U.S. stock in­dexes closed sharply higher.

The min­utes also showed the FOMC reau­tho­rized for­eign cur­rency swap ar­range­ments with a num­ber of other cen­tral banks. Fed Chair Janet Yellen said last week the U.S. cen­tral bank still ex­pected to raise rates grad­u­ally in 2016 but ac­knowl­edged a weak­ened global econ­omy and a steep slide in stock mar­kets was tight­en­ing fi­nan­cial con­di­tions faster than the Fed wants.

Ad­viser to PM on For­eign Affairs Sar­taj Aziz in a meet­ing with Am­bas­sador of Iraq Dr Ali Yasin Mo­ham­mad Karim.

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