Top Fed policymaker doesn’t expect interest rate hike this year
A much-anticipated increase in a key interest rate is looking less likely this year amid lackluster job growth and a slowing global economy.
On Tuesday, Federal Reserve Gov. Daniel Tarullo said he didn’t anticipate a hike in the so-called federal funds rate before the end of the year — signaling a shift by central bankers from just two weeks ago.
He told CNBC-TV that he was concerned that the ramifications of a premature interest rate hike, which could slow the U.S. economy, “might be harder to deal with than waiting a bit longer.”
Tarullo’s comments followed those of Fed Gov. Lael Brainard, who this week publicly argued “the case for watching and waiting” before raising the rate for the first time in a decade.
As recently as last month, Fed Chairwoman Janet L. Yellen said she expected a rate hike this year “unless the economy surprises us.”
The surprise came about a week later with the release of a disappointing September jobs report. Yellen has stressed that the Fed would make a decision based on incoming economic data — and lately that data has not been good.
“If they kept talking about a rate hike by the end of the year, I think they’d lose more and more credibility,” said Gary Schlossberg, senior economist at Wells Capital Management. “I think there’s a whole list of reasons why they shouldn’t move.”
Asked if he expected a hike this year, Tarullo said, “I wouldn’t expect it would be appropriate to raise rates.”
He quickly added that his outlook could change “based on developments in the economy.”
The main risk of keeping the rate near zero percent is high inflation. But Tarullo and others have noted inflation has been running well below the Fed’s 2% annual target.
The federal funds rate has been near zero percent since late 2008 in an attempt to stimulate growth by making it more attractive to borrow than save.
Tarullo is one of 10 voting members of the policymaking Federal Open Market Committee. This week, a non-voting member of the committee, James Bullard, president of the Federal Reserve Bank of St. Louis, said the central bank should raise the rate before the end of the year.
Fed officials meet at the end of this month and then again in mid-December.
“It’s getting to be a closer and closer call” for a rate hike happening this year, said Diane Swonk, chief economist at Mesirow Financial.
Yellen has not spoken publicly since the Labor Department reported Oct. 2 that the U.S. economy added 142,000 jobs in September. The figure was well below expectations and, combined with a downward revision to August’s figure, indicated the job market was slowing.
On Monday, Brainard made her case for waiting on a rate hike during a speech in Washington.
Although she didn’t specifically say whether she expected a hike this year, Brainard said slowing growth in China and elsewhere posed potential risks to the U.S. economy.
“The downside risks make a strong case for continuing to carefully nurture the U.S. recovery — and argue against prematurely taking away the support that has been so critical to its vitality,” she said.
Throughout the summer, economists expected the Fed to raise the rate at its September meeting.
But global financial markets turned tumultuous after China devalued its currency in late August, a sign its economy might be slowing.
In a 9-1 vote, Fed officials decided to hold off on a rate hike at their September meeting so they could wait for data showing the effect of the market turmoil on the U.S. economy.
In their quarterly projections, released at the meeting, most Fed policymakers still indicated they expected a rate hike this year, and Yellen emphasized that point.
But the September jobs report showed the global slowdown appeared to be having a negative effect. Then last week, the International Monetary Fund lowered its forecast for global economic growth this year.
The IMF and the World Bank have urged the Fed not to raise interest rates this year.
“It’s bringing the Fed more closely in line with the market,” Schlossberg said of Tarullo’s comments. “The market was of the view after the employment report that we wouldn’t see anything until next year.”
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