Fed Officials Urge Patience to Gauge Turmoil's Impact on Economy

Goldman, Pimco: Traders Aren't Ready for Fed Hikes
  • Dudley tells MNI `things have happened' that may alter outlook
  • Brainard highlights risks to economic outlook in WSJ comments

Two top Federal Reserve officials said policy makers need to take into account tighter financial conditions when they meet next month to decide whether to raise interest rates again.

QuickTake The Fed Lifts Off

“Recent developments reinforce the case for watchful waiting,” Fed Governor Lael Brainard said in comments to the Wall Street Journal in an article published Wednesday. New York Fed President William Dudley said in an interview with Market News International that financial conditions are “considerably tighter” than in December, and if they remained in place by March, “we would have to take that into consideration in terms of that monetary-policy decision.”

After the Federal Open Market Committee raised interest rates in December for the first time since 2006 and signaled it was prepared to tighten borrowing costs by 1 percentage point this year, policy makers last week raised the prospect for a change in their assessment. The FOMC left its target for the benchmark federal funds rate unchanged at 0.25 percent to 0.5 percent and said it was “closely monitoring” the impact of financial-market turbulence and global risks to growth.

“I read that as saying we’re acknowledging that things have happened in financial markets and in the flow of the economic data that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward,” Dudley told MNI. “But it’s a little soon to draw any firm conclusions from what we’ve seen.”

On Hold

Investors have cut the probability they see of the Fed raising rates at its next meeting in March to about 12 percent from 50 percent this time last month, according to pricing in fed-funds futures, which also signal that investors don’t fully expect a rate hike until next year.

Economists at Goldman Sachs have pushed back their forecast for tighter borrowing costs, citing financial conditions that have tightened “meaningfully.” Jan Hatzius and Zach Pandl wrote in a note that they anticipate the next rate increase in June instead of March, followed by two more steps this year.

A gauge of financial conditions calculated by the Chicago Fed had risen to -0.55 in the week ending Jan. 29, the latest for which data are available, from -0.58 after the December FOMC meeting. Negative values of the index indicate conditions are looser than on average, while positive values signal a tighter stance.

Brainard expressed concern that stresses in emerging markets including China and slow growth in developed economies could spill over to the U.S.

“This translates into weaker exports, business investment, and manufacturing in the United States, slower progress on hitting the inflation target, and financial tightening through the exchange rate and rising risk spreads on financial assets,” she said, according to the Journal, which said she made the comments on Monday.

The remarks by Brainard and Dudley follow a speech Monday by Fed Vice Chairman Stanley Fischer in which he discussed the implications for U.S. growth of turmoil in financial markets and uncertainty over China.

“If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States,” Fischer said. “But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.”

Chair Janet Yellen will have an opportunity to provide her views on the outlook when she appears before Congress to discuss the economy and monetary policy next week.

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