Speaking in New York, Dennis Lockhart said a lift-off in interest rates in October or December was still “likely appropriate”, given the recovery of the U.S. economy remained on track.
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The Federal Reserve released details Thursday of its policy meeting last month, shedding new light on why the central bank declined to raise key interest rates – instead leaving them untouched for six years running. “The precise timing for first increase in the federal funds rate is less important to me than the path the funds rate will follow over the entire policy normalization process”, he said, suggesting the rate may need to still be below 1 percent by the end of next year. That’s a problem for the Fed because it needs inflation to pick up in order to justify a rate hike.
The problem with this is that there is a growing concern that the much vaunted “data dependence” on which the Fed has relied, especially if it now includes global data, could lead to inertia that will (or already has, depending on who you believe) leave them behind the curve when it comes to inflation.
A rate hike in October is “possible”, as a move is now on the table at every meeting, Dudley said in an interview on CNBC on Friday.
“Have we seen enough information between September and October to convince us to do in October what we didn’t do in September?” “Based on my forecast, yes I am” expecting to raise rates this year, said Dudley, a close ally of Yellen who has a permanent vote on policy.
Spurring the losses, minutes from the Fed’s latest meeting showed policy makers discussing the damping effect of dollar strength on inflation and exports, while repeating their intention to lift the overnight target.
Meanwhile, other economic reports did not paint an encouraging picture either.
The expectations of higher rates in the United States has also been a major factor boosting the dollar, which as expected dropped in value against the U.S. major trading partners following the weak outlook.
The FOMC minutes elaborated on its concerns about global markets, particularly the Chinese slowdown. “I perceive a touch more downside risk” to raising interest rates “than I saw a few weeks ago”. “Cumulative progress is consistent with liftoff soon”, he says.
Mr. Lockhart acknowledged the frustration many in markets feel with a Fed communications strategy that keeps seeming to point to a rate rise that doesn’t seem to arrive.
“Uncertainty is high about the exact month, but our sense is that the first hike will not come until June 2016”, the analyst added.
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The dollar tumbled against the euro Friday as investors weighed fading prospects of a Federal Reserve interest rate increase even as Fed officials kept a hike by year-end in play. But he cautioned, “That view is not immutable and will respond to economic developments over time”.
