For US Federal Reserve officials, the US economy is a glass house where aggressive moves could break something.
While the median forecast of policymakers still calls for two interest-rate increases by the end of the year, more officials say just one would be enough. Still more advocate a go-slow approach to further tightening next year.
Projections from the US Federal Open Market Committee published on Wednesday showed that five officials foresee one increase in the federal funds rate this year, up from just a single policymaker who said so in March. While policymakers said the economy has picked up after a first-quarter slump, Fed Chair Janet Yellen said she still wants to see more “decisive” evidence of a lasting turnaround.
“There is concern about the fragility of the expansion,” former Fed Division of Monetary Affairs economist and Johns Hopkins University professor Jonathan Wright said. “Growth in the first half of the year seems to have been very weak.”
Growth slumped at a 0.7 percent annual rate in the first quarter amid severe weather, port disruptions and a stronger US dollar that sapped exports. Consumers still have a high propensity to save much of their incomes rather than spend. Manufacturing has slowed, and global risks, including the possibility Greece is set to default on its debt have increased.
Fed officials “just don’t have confidence yet,” JPMorgan Chase & Co chief US economist Michael Feroli said. “Global factors definitely hit forcefully in the first quarter and it doesn’t look like the global economy is picking up steam.”
At her press conference following the Federal Open Market Committee meeting, Yellen cited signs of “cyclical weakness” in the labor market, and noted wage growth remains “subdued.”
“Although progress clearly has been achieved, room for further improvement remains,” Yellen said. “Economic conditions are currently anticipated to evolve in a manner that will warrant only gradual increases in the target federal funds rate.”
In the first five months of this year, non-farm payrolls have expanded by just over a million workers. Residential construction has also shown signs of life as housing starts in April and last month registered the best back-to-back readings since 2007.
Still, Fed policymakers reiterated in their statement that, before raising interest rates, they must be “reasonably confident” that inflation is set to move back to their 2 percent target over the medium term.
Inflation minus food and energy decelerated to 1.2 percent for the year ending April. That compares with a rate of 1.4 percent for the year ended April last year.
Yellen stressed that the date of the first interest-rate increase is less important than the trajectory of subsequent ones.
On that score, officials reduced their median estimate for the federal funds rate at the end of next year to 1.625 percent from 1.875 percent in their March forecast, and to 2.875 percent for the end of 2017, down from 3.125 percent in March.
The shallower interest-rate outlook shows that this tightening cycle is set to be very unlike previous ones and might not be a cycle at all. In previous periods, Fed officials were intent on getting ahead of inflationary pressure that usually emerges in recoveries.
By contrast, inflation has been below the Fed’s 2 percent goal for three years, and there are few signs of a resurgence. Consequently, Fed officials are talking about data dependence, or an interest-rate cycle that would be responsive to what current indicators are saying about the near-term outlook.
Yellen stressed the Fed does not intend “to follow any type of mechanical approach to raising the federal funds rate.”
“We will evaluate incoming conditions and move in the manner that we regard as appropriate,” she said.
ISSUES: Gogoro has been struggling with ballooning losses and was recently embroiled in alleged subsidy fraud, using Chinese-made components instead of locally made parts Gogoro Inc (睿能創意), the nation’s biggest electric scooter maker, yesterday said that its chairman and CEO Horace Luke (陸學森) has resigned amid chronic losses and probes into the company’s alleged involvement in subsidy fraud. The board of directors nominated Reuntex Group (潤泰集團) general counsel Tamon Tseng (曾夢達) as the company’s new chairman, Gogoro said in a statement. Ruentex is Gogoro’s biggest stakeholder. Gogoro Taiwan general manager Henry Chiang (姜家煒) is to serve as acting CEO during the interim period, the statement said. Luke’s departure came as a bombshell yesterday. As a company founder, he has played a key role in pushing for the
China has claimed a breakthrough in developing homegrown chipmaking equipment, an important step in overcoming US sanctions designed to thwart Beijing’s semiconductor goals. State-linked organizations are advised to use a new laser-based immersion lithography machine with a resolution of 65 nanometers or better, the Chinese Ministry of Industry and Information Technology (MIIT) said in an announcement this month. Although the note does not specify the supplier, the spec marks a significant step up from the previous most advanced indigenous equipment — developed by Shanghai Micro Electronics Equipment Group Co (SMEE, 上海微電子) — which stood at about 90 nanometers. MIIT’s claimed advances last
CROSS-STRAIT TENSIONS: The US company could switch orders from TSMC to alternative suppliers, but that would lower chip quality, CEO Jensen Huang said Nvidia Corp CEO Jensen Huang (黃仁勳), whose products have become the hottest commodity in the technology world, on Wednesday said that the scramble for a limited amount of supply has frustrated some customers and raised tensions. “The demand on it is so great, and everyone wants to be first and everyone wants to be most,” he told the audience at a Goldman Sachs Group Inc technology conference in San Francisco. “We probably have more emotional customers today. Deservedly so. It’s tense. We’re trying to do the best we can.” Huang’s company is experiencing strong demand for its latest generation of chips, called
GLOBAL ECONOMY: Policymakers have a choice of a small 25 basis-point cut or a bold cut of 50 basis points, which would help the labor market, but might reignite inflation The US Federal Reserve is gearing up to announce its first interest rate cut in more than four years on Wednesday, with policymakers expected to debate how big a move to make less than two months before the US presidential election. Senior officials at the US central bank including Fed Chairman Jerome Powell have in recent weeks indicated that a rate cut is coming this month, as inflation eases toward the bank’s long-term target of two percent, and the labor market continues to cool. The Fed, which has a dual mandate from the US Congress to act independently to ensure