The Federal Reserve should avoid removing support for the USA economy too quickly because of potential weakness in the labor market and risks of foreign economic downturns, Fed Governor Lael Brainard said on Monday.
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“Though yesterday’s decline in European markets may have been a direct result of Friday’s sharp United States selloff, today’s higher European open is set to come about as a result of last night’s sharp rebound in U.S. markets after permanent Fed member Lael Brainard reinforced earlier comments from non-voting member, and Minneapolis Fed President Neal Kashkari that there was no rush to move ahead on raising rates, pulling USA stocks sharply off their intraday lows”.
She said the U.S. central bank should adopt a “moderate and gradual” approach to lifting rates and avoid moves to “tighten policy pre-emptively”. Low rates have fueled a steady rise in stock prices as investors put their money in high-risks stocks instead of low-interest savings accounts or bonds.
In her speech in Chicago, Brainard suggested that the risk that higher rates might damage a fragile economy exceeds the risk that lower rates might ignite inflation. Brainard, a member of the board of governorrs, is the last speaker before next week’s Fed meeting.
Atlanta Fed Governor Dennis Lockhart wasn’t so sure. Presidents of the Fed’s regional banks are far more likely to cast dissenting votes.
The Dow Jones industrial average rose 47 points, or 0.3 percent, to 18,132 as of 10:20 a.m.
The gains in the main three USA indexes made up for more than half of Friday’s losses.
Even as the Federal Reserve has given little indication on the timing of the next rate hike, investors have taken cues from a number of top central bank officials hinting at a possible raise at the Fed’s next policy-setting meeting on September 20-21. German investor confidence remained unchanged at 0.5 for September, according to a report from the ZEW Center for European Economic Research in Mannheim – a disappointment for economists surveyed by Bloomberg who had been expecting an improvement to 2.5.
THE QUOTE: David Kelly, chief global strategist for JPMorgan Funds, said he thinks Federal Reserve policymakers seem “noncommittal” and aren’t sure if they should raise interest rates next week or not. Rosengren’s comments – and anxiety about what Brainard might say – had sent stocks tumbling Friday.
Brainard, a former White House official in the administration of Bill Clinton and Treasury Department official during the Obama administration, is seen as a contender for a top job in a potential Hillary Clinton administration.
While Yellen has met with Obama, the Fed as an institution is independent when it comes to raising or lowering rates, and both Yellen and other rate-setters have said the Fed has no view on the November 8 election.
The Fed raised the short-term rate it controls in December for the first time since 2006.
The global economy has been sputtering.
With expectations for a rate rise reduced slightly the dollar dipped against its peers, easing to 101.61 yen from 101.85 yen in NY, while the Australian dollar jumped 0.7 percent and the South Korean won added 0.2 percent.
“The fallout from adverse foreign shocks appears to be more powerfully transmitted to the US than previously”, she said. But she noted, that, “the kind of low inflation, low growth expectations environment that some other countries have been grappling with is also an environment that is perilous for financial stability”. The biggest gains went to safe investments that pay big dividends, as they are more enticing to investors when interest rates and bond yields are low. Brainard indicated Monday, Sept. 12, 2016, that she’s in no hurry to raise interest rates again, comments that could be greeted with relief on Wall Street.
Unlike Ms. Brainard, neither Mr. Lockhart nor Mr. Kashkari is now a voting member of the rate-setting Federal Open Market Committee. As part of the same release, the IEA said that Saudi Arabia had overtaken the USA as the world’s largest oil producer.
Despite her suggestion that it may be too soon for the Fed to resume raising rates, Brainard agreed in her speech that by most measures, the USA job market is steadily improving. Gradually tightening monetary policy is appropriate to maintaining full employment, he added.
“The flow picture is more favourable compared to previous year as the European Central Bank has beefed up quantitative easing to 80 billion euros per month and weekly purchases having returned to the pre-summer run-rate in excess of 16 billion last week”, they said in a note.
Perrigo (PRGO.N) jumped 7.34 percent after activist investor Starboard Value disclosed a stake in the drugmaker and said it must make improvements to revive its stock.
The biggest fall in USA crude oil inventories since 1999 last week, together with hopes for a deal between Saudi Arabia and Russian Federation on stabilizing crude output at this month’s OPEC meeting, have helped to support oil prices in the past week. Retail giant Wal-Mart rose 84 cents, or 1.2 per cent, to $71.14 and toothpaste maker Colgate-Palmolive gained 89 cents, or 1.3 per cent, to $71.75.
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When it comes to raising rates, Brainard said, economic weakness “counsels prudence”.
