Un­cer­tainty grows about a third uptick in in­ter­est rates

Honolulu Star-Advertiser - - LOCAL | BUSINESS - By Martin Crutsinger As­so­ci­ated Press

WASHINGTON >> Fed­eral Re­serve of­fi­cials strug­gled in Septem­ber to come to terms with per­sis­tently low in­fla­tion but de­cided to con­tinue to sig­nal the pos­si­bil­ity of rais­ing in­ter­est rates for a third time this year.

The min­utes of their most re­cent pol­icy meet­ing re­leased Wednesday show that a group of Fed of­fi­cials ex­pressed con­cern that low un­em­ploy­ment could cause in­fla­tion to surge and a rate hike was needed, pre­sum­ably when it meets in De­cem­ber. An­other group sug­gested that no fur­ther rate in­creases were called for in the near term.

In­vestors, though, have set­tled around the no­tion that a De­cem­ber rate hike is all but guar­an­teed. The lat­est CME Group sur­vey, based on trad­ing on the di­rec­tion of the Fed’s bench­mark rate, places the prob­a­bil­ity of a De­cem­ber rate hike at 88 per­cent.

But some econ­o­mists ex­press more un­cer­tainty. They think the Fed might not raise rates by year’s end un­less eco­nomic re­ports be­tween now and its

Dec. 12-13 meet­ing show that in­fla­tion has be­gun to edge up to­ward the Fed’s 2 per­cent tar­get.

“The Fed is clearly inch­ing closer to pulling the trig­ger for a third rate hike this year, but that doesn’t seal the deal,” said Chris Rup­key, chief fi­nan­cial econ­o­mist at MUFG Union Bank in New York.

Chair Janet Yellen and other Fed of­fi­cials ear­lier this year pointed to tran­si­tory fac­tors, such as fall­ing prices for cell phone plans, to help ex­plain why in­fla­tion was likely mov­ing far­ther be­low the Fed’s 2 per­cent in­fla­tion goal. But with un­de­sir­ably low in­fla­tion per­sist­ing, she and other of­fi­cials have re­cently ac­knowl­edged that per­haps some­thing more long-last­ing may be hap­pen­ing.

The min­utes of the Fed’s Septem­ber meet­ing re­vealed that the de­bate over in­fla­tion was a key talk­ing point dur­ing the two days of dis­cus­sions.

“Many par­tic­i­pants ex­pressed con­cern that the low in­fla­tion read­ings this year might re­flect not only tran­si­tory fac­tors but also the in­flu­ence of de­vel­op­ments that could prove more per­sis­tent,” the min­utes said.

“A few of these par­tic­i­pants thought that no fur­ther in­creases in the fed­eral funds rate were called for in the near term,” the min­utes said.

Still, an­other group of of­fi­cials con­tin­ued to ex­press con­cerns that in­fla­tion could re­bound very quickly, given low un­em­ploy­ment. The job­less rate in Septem­ber fell to a 16-year low of 4.2 per­cent after hav­ing been at 4.4 per­cent at the time of the dis­cus­sions.

This group wor­ried that low un­em­ploy­ment might spark higher wage de­mands. This group also wor­ried that the low Fed rates could also re­sult in bub­bles in as­set prices such as stocks, lead­ing to fi­nan­cial in­sta­bil­ity.

The Fed’s key rate is at a still-low range of 1 per­cent to 1.25 per­cent after two quar­ter-point rate hikes this year, in March and June.

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