Fed fore­sees grad­ual pace of rate hikes

The Pak Banker - - COMPANIES/BOSS -

Fed­eral Re­serve Chair Janet Yellen said that the Fed still en­vi­sions a grad­ual pace of in­ter­est rate in­creases in light of global pres­sures that could weigh on the US econ­omy.

Yellen did not spec­ify a timetable for fur­ther hikes to fol­low the Fed's rate in­crease in De­cem­ber from record lows. She said the risks to the United States re­main lim­ited but cau­tions that as­sess­ment is sub­ject to "con­sid­er­able un­cer­tainty."

In pre­pared re­marks to the Eco­nomic Club of New York, the Fed chair said the cen­tral bank is mon­i­tor­ing the ef­fects of a global eco­nomic slump, lower oil prices and stock mar­ket tur­bu­lence. She said that given the risks, the Fed will "pro­ceed cau­tiously" in rais­ing rates.

Most econ­o­mists ex­pect no hike at the Fed's next pol­icy meet­ing, to be held April 26-27.

Yellen's re­marks on the Fed's eco­nomic outlook and in­ter­est rate pol­icy have been highly an­tic­i­pated by in­vestors try­ing to divine the tim­ing of the next rate in­crease.

When the Fed met two weeks ago, it kept its key rate un­changed and sig­naled the like­li­hood of just two rate in­creases this year. That was half the num­ber that Fed of­fi­cials had en­vi­sioned in De­cem­ber, when they raised their bench­mark rate from record lows - their first hike in nearly a decade. As a re­sult, most econ­o­mists con­cluded that no rate in­crease would likely oc­cur be­fore June. But com­ments last week from sev­eral of the Fed's re­gional bank pres­i­dents had raised the pos­si­bil­ity that the cen­tral bank will de­cide to raise rates in April. One of them, Den­nis Lock­hart of the Fed's At­lanta re­gional bank, said in a speech that he thought the strength of the most re­cent US eco­nomic data could jus­tify a rate in­crease as early as April.

The views ex­pressed by Lock­hart, who is viewed as a cen­trist in his ap­proach to in­ter­est rates, was echoed by some other Fed re­gional bank pres­i­dents.

Lock­hart sug­gested that de­spite global eco­nomic weak­ness, the US job mar­ket is near­ing full health - a key con­di­tion for a rate in­crease. He also said he thought that in­fla­tion, which has re­mained per­sis­tently be­low the Fed's 2 per­cent tar­get rate for nearly four years, would likely be­gin pick­ing up later in the year.

The mes­sage from Lock­hart and some other re­gional bank pres­i­dents seemed to de­part from the sig­nal sent by the state­ment the Fed is­sued March 16 and by the news con­fer­ence Yellen held af­ter­ward. The theme then was of a slower pace of rate in­creases in light of global pres­sures that risk slow­ing the US econ­omy.

In a speech in Sin­ga­pore on Tues­day, John Wil­liams, pres­i­dent of the Fed's San Fran­cisco re­gional bank, said his outlook for both the US and the global economies re­mains largely un­changed over the past few months. He said the Fed has made it "abun­dantly clear" in its com­mu­ni­ca­tions that it ex­pects to raise rates grad­u­ally.

"We took the first small step with a mod­est rate hike in De­cem­ber, and the fu­ture will be, as we've said re­peat­edly, grad­ual and thought­ful," said Wil­liams, who had sug­gested last week that a rate hike in ei­ther April or June was pos­si­ble.

What­ever de­ci­sion the Fed does make in April will hinge on its view of the econ­omy's dura­bil­ity. In the past week, some re­ports have pro­duced weaker-than-ex­pected read­ings, in­clud­ing a sharp drop in or­ders for long-last­ing man­u­fac­tured goods and tepid con­sumer spend­ing. Those re­ports have led some econ­o­mists to down­grade their fore­casts for growth in the cur­rent Jan­uary-March quar­ter from a 2 per­cent an­nual rate to a lack­lus­ter 1 per­cent.

The con­sumer spend­ing re­port also showed that the Fed's pre­ferred in­fla­tion gauge is still sig­nal­ing that in­fla­tion re­mains well be­low its tar­get level. For the 12 months that ended in Fe­bru­ary, in­fla­tion rose just 1 per­cent. "Core" in­fla­tion, which ex­cludes the volatile items of food and en­ergy, in­creased 1.7 per­cent.

Be­cause of the sub­par in­fla­tion and the weak­ness in con­sumer spend­ing, which drives about 70 per­cent of eco­nomic ac­tiv­ity, many econ­o­mists still say the Fed will be cau­tious about rais­ing rates.

"The num­bers show that in­fla­tion is nowhere to be found, and con­sumers at the mo­ment are on strike," said Sung Won Sohn, an eco­nom­ics pro­fes­sor at Cal­i­for­nia State Univer­sity, Chan­nel Is­lands.

"They don't want to spend money be­cause of un­cer­tainty in the econ­omy, in­clud­ing the re­cent volatil­ity in the stock mar­ket." Sohn said he thought the eco­nomic outlook re­mained too un­cer­tain to jus­tify any rate hikes at all this year. "I don't think ei­ther the global econ­omy or the US econ­omy are on a sound track at the mo­ment," he said.

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