What Mr. Lockhart did not do is repeat that he believed the economy was ready for the Fed to start raising rates in September.
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Federal Reserve officials have held out the prospect that at long last they may raise interest rates at their September meeting, with the hike taking effect by year’s end barring major unforeseen developments.
“You would be insane to raise interest rates when markets are in such turmoil”, said Martin Barnes, chief economist at BCA Research in Montreal. When it surveyed its members in March, 71 per cent of economists believed the Fed would raise rates in 2015.
As part of Monday’s sell-off, investors also scaled back their own bets on long-term U.S. inflation.
Economists believe that if the U.S. economy continues to improve, the Fed’s interest rate will eventually top out at 3 percent.
With market jitters hitting home, however, the Fed has a number of reasons to be cautions even about taking that first step.
“I expect the normalization of monetary policy — that is, interest rates — to begin sometime this year“, Lockhart said Monday in Berkeley, California, without citing a particular month.
Secondly, the Fed has to consider that market gloom might be a sign that the global economy is in worse shape than it has assumed, and the drag on the U.S. economy could be bigger than previously factored in by the central bank.
Summers said by tightening interest rates, the Fed increases its chances of missing its 2% inflation target – to the downside. “We’ve pushed through several domestic fiscal showdowns-including one federal government shutdown-a tsunami, two major winter weather events, geopolitical tensions, and wide swings of global energy prices“. The economic data since then has been neither too strong nor too weak to change that message. She also needs to build up ammunition to counter the next economic downturn, he said.
Writing in The Financial Times on Monday, Summers argues that the Fed will be risking setting off a financial crisis by electing to raise rates at some point this year – which the Fed has made clear it plans to do.
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The devaluation only served to underscore another worry Fed policymakers voiced in the July meeting: that raising the fed funds rate would exacerbate the strength of the US dollar, “extending the downward pressure on commodity prices and the weakness in net exports”. The zero-rate policy and its now-ended quantitative easing programs have injected trillions of dollars in cheap money into the global economy, they very thing that has helped fuel market bubbles like China’s.
