Global stock-market turmoil has weakened the case for raising interest rates in September, Federal Reserve Bank of New York President William C. Dudley said, cautioning it’s important not to overreact to short-term developments.
“From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” Dudley told a news conference Wednesday at the New York Fed.
“Normalization could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing, and more information on international and financial market developments.”
World financial markets have been convulsed by concerns over weaker Chinese growth, just as the Fed debates its first rate increase since 2006. About $8 trillion has been erased from the value of global equities since the country’s surprise devaluation of the yuan on Aug. 11 as investors weighed a darkening outlook for the world’s second-largest economy.
Dudley is the most senior U.S. central banker to speak publicly since the market rout began. His comments come as world central bankers head toward Jackson Hole, Wyoming, for the Kansas City Fed’s annual mountain retreat later this week, where their academic discussion about inflation will probably be overshadowed by the implications of slower Chinese growth.
Dudley’s wariness makes “September extremely unlikely as a liftoff date,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York, who formerly worked at the Richmond Fed. “The Fed needs to see more progress before liftoff. The precondition will be a stabilization in the commodities markets.”
The Standard & Poor’s 500 Index climbed almost 1 percent in the 15 minutes after Dudley’s comments were reported, rebounding from what was at the time its lowest level of the day. Two-year Treasury yields fell as much as 0.05 percentage point to 0.63 percent in the 20 minutes after his remarks.
Investors have sharply reduced the probability of a move next month, with trading in federal funds futures on Wednesday implying a 24 percent probability they will act, compared with 48 percent on Aug. 18. Fed Chair Janet Yellen has said the central bank is likely to raise rates this year if the economy grows as expected. Dudley said he hoped that would still be the case.
“I really do hope that we can raise interest rates this year, because that would be a sign that the U.S. economic outlook is good and that we’re actually on track to achieve our dual mandate objective,” Dudley said. “Let’s see how the data unfold before we make any statements about exactly when that might occur.”
Dudley also said he was “far away from the conversation of quantitative easing at this point,” in response to speculation the Fed might be be forced to resume bond purchases in order to shield the U.S. from a global slowdown.
The policy-setting Federal Open Market Committee next meets on Sept. 16-17 in Washington. Dudley is the only regional Fed president with a permanent vote on the FOMC.
Dudley said one important way that market volatility could influence the U.S. economy was though the so-called wealth effect, in the event that stock market losses lead Americans to cut back their spending. Another key channel is what happens to inflation, which has been running below the Fed’s two percent target for over three years.
“One thing we’ll have to be focused on is, what’s the implications of this turmoil on the prices of goods and services that we import into the U.S. and how is that going to affect the inflation outlook,” Dudley said.