U.S. Fed holds off on rate hike, despite some misgivings.

United support for holding back hike

OTTAWA • Janet Yellen may know something about the economy that many others do not. But she nevertheless seems to have a way of making sure that all the voting members of the U.S. central bank see things her way — and vote accordingly.

Yellen, the chair of the U.S. Federal Reserve Board and a veteran on the country’s central bank circuit, is indicating a possible pushback for interest rate liftoff — up until now, almost universally expected for September.

There now seems to be more wiggle room on the timing of the first move — a unanimous agreement among policy-makers that caution is the best course.

Few, if any, thought the first U.S. increase in nine years would come in June. That forecast fell out of favour after severe winter weather, a strong U.S. dollar and the collapse in oil prices conspired to shrink the economy in the first quarter.

Certainly, Yellen knows the Fed’s so-called dot plots — which illustrate what the Federal Open Market Committee’s 17 members consider the ap- propriate pace for policy tightening — isn’t necessarily pointing to the need for a rate increase quite yet.

But at least all other members of the committee are declaring their support of the same view — continuing a string of unanimous votes this year, a possible sign of Yellen’s tightening grip since taking over from Ben Bernanke in February 2014.

On Wednesday, she appeared to hedge her bets — and those of other committee members — on when, why and by how much rates will eventually move before the end of 2015.

“There are a number of risks in judging the appropriate time of the beginning of normalization,” Yellen said during a news conference in Washington, which followed the committee’s two-day policy meeting and the release of its policy statement and revised economic forecasts.

On one hand, she said “waiting too long to begin normalization can risk significantly overshooting our inflation objective, given the lags in the operation of monetary policy. And, on the other hand, beginning too early could risk derailing the recovery that we’ve worked for a very long time to try to achieve.”

“So, we’re trying to assess those risks. But I want to emphasize (that) sometimes too much attention is placed on the timing of the first increase in the federal funds rate,” she told reporters.

The Fed could now target December for the central bank’s first increase since 2006, and the first move of any kind since 2008, when the overnight lending rate was set at a range of zero to 0.25 per cent.

Prab Sagoo, associate director at Nasdaq Advisory Service in New York, said Wednesday’s decision “will open the door further to the possibility of a rate increase in September or more likely at their following meeting.”

We do know that Yellen needs to see inflation closer to the Fed’s two per cent target, along with stronger employment and wage growth, before pushing the lever on borrowing costs. The U.S. economy — like Canada’s — is still struggling to regain traction after the disastrous start to

We think that the Fed is going to stick to the script. And we see September as the most likely date

2015. Growth contracted 0.7 per cent south of the border between January and March. By comparison, output in Canada declined 0.6 per cent over the same period.

On Wednesday, the Fed lowered its 2015 growth outlook to between 1.8 and two per cent, down from the previous forecast of 2.3 to 2.7 per cent. However, the U.S. central bank raised output estimates to between 2.4 and 2.7 per cent for 2016, from 2.1 to 2.5 per cent. “That’s been the Fed’s strategy — to prep markets, not shock markets,” said Emanuella Enenajor, Canada and U.S. economist at Bank of America/Merrill Lynch in New York. “We think that the Fed is going to stick to the script. And we see September as the most likely date,” she said. “If the data are a bit jumpy, then perhaps December. They might want to give themselves that little bit of extra time.”

As for Yellen’s sway over other policymakers, Douglas Porter, chief economist at BMO Capital Markets said “it is somewhat curious that no one called for a rate hike at this meeting, given how hawkish some of the Fed presidents are.”

“On the flip side, the more dovish members have nowhere to go, given that QE (quantitative easing) is over and rates are effectively at zero — so dissenters can really only be on the hawkish side,” he said.