Fed Sets Up for Slower Rate Path at March Meetingby
Fed officials focused on China, market turmoil and inflation
More stock declines, costlier credit adds up to a tightening
Federal Reserve officials are already signaling why they might lower forecasts for growth, inflation and the path of future interest rates when they meet next month.
Minutes from the January Federal Open Market Committee meeting released Wednesday in Washington show that officials were worried about a series of drags and disruptions that are likely to derail their December projection of four rate increases this year.
First, China’s slowdown remains a big risk for global growth. Even if the Fed doesn’t have clarity on the outlook for China when it meets next month, tightening policy in the face of the possibility of a “sharper deceleration” in world’s second-largest economy seemed a step too far for many officials. Minutes from the January meeting noted that such a “downshift” could increase financial stress in emerging markets and, importantly, in the economies of big U.S. trading partners such as Mexico and Canada.
Second, global financial-market volatility is unsettling U.S. central bankers. The economic impact of further persistent declines in stocks as well as widening credit spreads would be “roughly equivalent to those from further firming in monetary policy,” the minutes said.
Lastly, “a number” of officials are starting to feel queasy about their inflation forecast. Fed officials in December estimated they would close in on their 2 percent inflation goal at the end of 2017. If that forecast is pushed out, it will likely result in a slower path of rate hikes.
Fed officials at their next meeting on March 15-16 will submit fresh quarterly forecasts for the U.S. economy and their estimates of the appropriate pace of rate increases over coming years, with each projection represented by a dot. The median estimate in December was for four increases in 2016.
“I don’t anticipate a move from the Fed in March. What I do expect though is the dots to come down, and the question is how much,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “They punted, and now they are going to have to come up with something. They just delayed the inevitable, which is that they are going to have to have a view on things.”
Fed Chair Janet Yellen suggested during congressional testimony last week that the central bank may delay, but not abandon, planned rate increases this year. Subsequent comments from policy makers have reinforced the message that they are in no hurry to tighten again after hiking in December for the first time since 2006.
“Recent global events may make it less likely that the 2 percent inflation target will be achieved as quickly as had been projected in recent forecasts,” Boston Fed President Eric Rosengren, a voter on the committee, said Tuesday. “If inflation is slower to return to target, monetary policy normalization should be unhurried.”