Fed to sit tight on rates at March meet­ing, hints at hikes to come

The Pak Banker - - FRONT PAGE -

The Fed­eral Re­serve won't raise in­ter­est rates this week, but will likely make clear that as long as U.S. in­fla­tion and jobs con­tinue to strengthen, eco­nomic weak­ness over­seas won't stop rates from ris­ing fairly soon.

That will be a big change from the last time the Fed met, when un­cer­tainty over the im­pact of slower growth in China and Europe drove pol­i­cy­mak­ers to sig­nal it would stay on hold un­til it could make a bet­ter call on the out­look.

That in turn was a set­back from just a month ear­lier, when the Fed raised rates for the first time in nearly a decade and seemed ready to move four more times this year.

This week, fresh fore­casts from the Fed's 17 of­fi­cials re­leased af­ter the meet­ing will al­most cer­tainly sig­nal a re­treat from that pace, to per­haps two or three rate hikes this year, econ­o­mists pre­dict and Fed of­fi­cials them­selves have sug­gested.

But the ex­pected down­grade may largely re­flect the drag from the oil and stock mar­ket slide in Jan­uary and the Fed's de­ci­sion then to put pol­icy on hold, rather than mount­ing wor­ries over the U.S. or global out­look.

In­deed, since the last Fed meet­ing U.S. in­fla­tion has shown signs of sta­bi­liz­ing, with one mea­sure pub­lished by the Dal­las Fed ris­ing to 1.9 per­cent, its clos­est to the Fed's 2 per­cent goal in 2-1/2 years. Mean­while, the U.S. un­em­ploy­ment rate held at 4.9 per­cent in Fe­bru­ary, near the level many Fed of­fi­cials be­lieve rep­re­sents full em­ploy­ment.

The Euro­pean Cen­tral Bank's de­ci­sion last week to ease pol­icy fur­ther may help add to con­fi­dence that ac­tion has been taken to un­der­pin growth in Europe, help­ing en­sure a stalling of global growth drag on the U.S.

That could mean an­other U.S. rate hike by mid-year and, de­pend­ing on eco­nomic data, more to come af­ter that.

"June seems cer­tainly like a pos­si­bil­ity" for the Fed's next rate hike, said for­mer Min­neapo­lis Fed Pres­i­dent Narayana Kocher­lakota, whose own pref­er­ence is for the Fed to take out "in­sur­ance" against a re­ces­sion by cut­ting rates back to near zero. Mar­ket-based in­fla­tion ex­pec­ta­tions have im­proved some­what since the Fed's last meet­ing, he said, "a real pos­i­tive" de­vel­op­ment.

Still, Kocher­lakota's for­mer col­leagues will likely spend plenty of time dis­cussing the in­fla­tion out­look. That much was clear last week, when two top Fed of­fi­cials, speak­ing si­mul­ta­ne­ously at sep­a­rate Wash­ing­ton events, gave di­verg­ing as­sess­ments of re­cent ev­i­dence of ris­ing prices. More hawk­ish rate set­ters worry that if the Fed does not act to pre­empt in­fla­tion, it could end up be­hind the curve and lose cred­i­bil­ity, while the more dovish mem­bers be­lieve the eco­nomic re­cov­ery is still frag­ile and want to see firm ev­i­dence of in­fla­tion­ary pres­sures.

"That's prob­a­bly in­ter­nally the big­gest grounds for de­bate," said Re­gions Fi­nan­cial Cor­po­ra­tion econ­o­mist Richard Moody.

The Fed will also need to tackle how to char­ac­ter­ize the "bal­ance of risks" to their base­line out­look, he said, par­tic­u­larly if pol­i­cy­mak­ers want to keep the door open to rate hikes in April or June.

"If they truly want the mar­kets to be­lieve that all the meet­ings are on the ta­ble (for a po­ten­tial rate hike) then I would think they have to have some­thing in there," Moody said, pre­dict­ing they will char­ac­ter­ize risks as "nearly bal­anced," the same phrase they used be­fore De­cem­ber's rate hike.

And yet, oth­ers say, Fed Chair Janet Yellen will be wary of send­ing too strong a sig­nal of com­ing rate hikes, for fear of roil­ing mar­kets.

"By June they will have a broad clutch of data and that could help them, and even some of the doves the Fed­eral Open Mar­ket Com­mit­tee, to come to a solid con­clu­sion (on the de­sir­abil­ity of a rate hike) and a con­clu­sion, by the way, that the mar­ket agrees with," said Quincy Krosby, a mar­ket strate­gist for Pru­den­tial Fi­nan­cial.

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