Federal Reserve Bank of Richmond President Jeffrey Lacker said on Tuesday that the economies of the United States and China are linked less than recent volatility in US equity markets seem to imply.
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Combined with continued weak readings on inflation, this means the Fed may have to slow the expected pace of rate hikes, which officials in December projected at four quarter-point increases over the coming year.
Still, he does not anticipate any spike in the US 10-year yield as a result of the Fed tightening, “owing to global influences, and widespread expectation that global policy rates will likely stay low through the rest of the decade”.
In his remarks that were prepared for delivery to the Dallas chapters of Financial Executives International, the Association for Corporate Growth and the National Association of Corporate Directors, Kaplan said, “I agree with, and argued for, the decision made in December by the (Fed) to increase the federal funds rate”.
Investors are now focused on when the next rate hike will be, with economists predicting March. Concern about China’s slowdown forced the Fed to hold off raising interest rates in September, he said, and it is unclear if such a thing could happen this time around too. This year has started off with global markets again rocked by plunges in Chinese stock markets, a fall in the yuan and subsequent heavy intervention by the Chinese authorities to push the yuan back up. “There’s no substitute for time in assessing economic data as it unfolds”, Mr Kaplan told reporters.
That was already happening, Kaplan said. “We do pay attention but it doesn’t determine what we are going to do”, he said in a question and answer session.
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“I would have a bias to want to move toward normalization”, Kaplan said.
