Fed Officials Stress Data Over Dates as Rate Rise Case BuildsJeff Kearns
Federal Reserve officials are signaling more confidence in the economy that moves them nearer to raising interest rates, and are stressing the liftoff is linked to data rather than dates to avoid unsettling markets.
Fed Vice Chairman Stanley Fischer said yesterday the central bank was getting closer to replacing a vow to hold rates low for a “considerable time” with guidance that tighter monetary policy will hinge on the economy’s performance.
The Federal Open Market Committee is embarking on a critical phase in its seven-year battle with a financial crisis, a recession and a sub-par recovery. If the economy keeps improving, officials will need to signal to investors that they’ll raise the federal funds rate without sending bond yields higher and slowing growth.
“FOMC members are a little bit challenged by the fear that they don’t want to rattle markets,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “It makes sense for them to proceed with caution.”
The policy-setting FOMC next meets on Dec. 16-17 and officials are expected to debate retaining their “considerable time” commitment. Officials have kept the rate pledge in place since their March meeting.
“We’re not going to suddenly stop that and not say anything, just take it out and leave no guidance,” Fischer told the Wall Street Journal CEO Council Annual Meeting yesterday.
“We don’t want to surprise markets,” Fischer said in Washington. “On the other hand, we can’t give precise estimates about dates that we don’t know, and that’s why the emphasis always goes back to the data, and not to the date.”
Both Fischer and New York Fed President William C. Dudley on Dec. 1 emphasized the benefits of lower oil prices for the U.S. economy, playing down the threat that the drop will push inflation even further below their 2 percent goal.
The Fed’s preferred gauge of price pressures facing U.S. consumers rose 1.4 percent in October from the same period a year ago and has not been above 2 percent since March 2012.
Dudley told an audience two days ago in New York that “life is uncertain and my judgment of the appropriate timing could change in response to incoming data and other factors” that change the economic outlook.
“When we do begin to tighten monetary policy, the pace of tightening will depend not only on the outlook but also on how financial market conditions respond as we begin to remove monetary policy accommodation,” the New York Fed chief said.
Both Fischer and Dudley were “relatively optimistic” on the U.S. economy and stressed the economic benefits of cheaper fuel costs, according to Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York.
“They’re much more upbeat on the economy and they’re certainly not talking about the downside as much,” Englander said. “Their comments, however gently phrased, are meant to at least lay on the table the risk that they will move faster than the market is currently pricing and that normalization begins sooner rather than later.”
Richmond Fed President Jeffrey Lacker, in an Dec. 1 interview with Market News International, cautioned that policy makers’ goal “should be not to add volatility to the market by being unclear about our plans.”
Dropping “considerable time” may be viewed as a clear signal the Fed was getting ready to raise rates, which have been held near zero since December 2008, at one of the next couple of FOMC meetings.
Such a move could cause bond yields to rise sharply, recalling the Fed’s experience last year, when then-Chairman Ben S. Bernanke began discussing the approaching end of the central bank’s asset purchase campaign, provoking a so-called taper tantrum.
Fed officials pushed back against that reaction in markets, assuring investors that the end of the bond buying didn’t mean that the central bank was about to increase its main rate.
The FOMC statement issued Oct. 29 repeated that officials expect to keep rates near zero “for a considerable time following the end of its asset purchase program this month” if inflation remains below the target.
They also added new language to say rates could rise sooner than anticipated if it makes faster progress toward its goals of full employment and stable prices. “Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”
Investors are betting the Fed will begin rate liftoff around July 2015, while a quarterly summary of Fed officials’ own estimates of the appropriate path of rate increases implies a steeper pace of policy tightening.
Closing that gap in interest-rate expectations will be a delicate task for the Fed, which risks hampering economic growth if its actions prompt borrowing costs to rise faster than officials believe is warranted by economic fundamentals.
Economists said the best strategy was for Fed officials to let data guide market expectations and monetary policy.
“They really don’t have to make a decision. They weren’t going to raise rates until mid-year, so now they can just watch and see how things play out,” said Kevin Logan, chief U.S. economist at HSBC Securities USA Inc.
Dudley said “premature tightening” could force the Fed to abort liftoff and repeated that expectations for the first rate rise around mid-2015 “seem reasonable to me.”