The US Federal Reserve on Friday left the door open to an interest rate hike next month even while several US central bank officials acknowledged that turmoil in financial markets, if prolonged, could delay the first policy tightening in nearly a decade.
Some top policymakers, including Fed Vice Chairman Stanley Fischer, said recent volatility in global markets could quickly ease and possibly pave the way for the US rate hike, for which investors, governments and central banks around the world are bracing.
With a key policy meeting set for Sept. 16-17, at least five Fed officials spoke publicly in what amounted to a jockeying for position on whether increasing the Fed’s benchmark overnight lending rate was too risky amid an economic slowdown in China, a rising US dollar and falling commodity prices.
“It’s early to tell,” Fischer told CNBC on the sidelines of the annual central banking conference in Jackson Hole, Wyoming. “We’re still watching how it unfolds.”
He, along with other Fed officials, acknowledged that the global equities sell-off that began last week would influence the timing of a rate hike, which until only a couple of weeks ago seemed increasingly likely to occur next month.
Concerns about China’s economy have whipsawed markets, including Wall Street, even while US economic data has been robust. US stock indices ended largely unchanged, capping a week that included both the market’s worst day in four years and biggest two-day gain since the 2007-2009 financial crisis.
“I think they could settle fairly quickly,” said Fischer, a close ally of Fed Chair Janet Yellen.
St Louis Fed President James Bullard told reporters he still favored hiking rates next month, although he added that his colleagues would be hesitant to do so if global markets continued to be volatile in the middle of next month.
The Fed’s policy committee “does not like to move right in the middle of a global financial storm,” Bullard, a Fed hawk, said in an interview. “So one of the advantages we have is that this storm is occurring now and, at least as of now, we think it will be settled down” by next month’s meeting.
The comments suggest the next two-and-a-half weeks will be critical for the Fed, as well as for global markets. A US rate hike is expected to hit emerging market equities and currencies particularly hard, adding to the sell-offs already seen.
Investors and economists have been betting the Fed would delay a policy tightening to December or later. However, after Fischer spoke, traders added to bets that a rate hike would come this year, with overnight indexed swap rates implying a 35 percent chance the Fed would move next month and a 77 percent chance of a December move.
Atlanta Fed President Dennis Lockhart, a centrist who has become less resolute about a rate hike next month as markets have tumbled, told Bloomberg TV that it was reasonable to see the odds of a move next month as roughly even.
One idea appearing to gain ground on Friday hinged on the Fed raising rates once or twice and then holding off until inflation started to rise to its 2 percent target. A strong US dollar and lower oil prices have kept a lid on prices despite an unemployment rate that is close to normal at 5.3 percent.
Bullard told reporters the Fed could hike rates once, then “hang out” at that level if inflation remains too low.
Cleveland Fed President Loretta Mester, another so-called hawk who like Bullard sometimes runs against the grain at the central bank, said the economy could still handle a modest rate hike, although she did not commit to backing a move next month.
“I want to take the time I have between now and the September meeting to evaluate all the economic information that’s come in, including recent volatility in markets and the reasons behind that,” she was quoted as saying by the Wall Street Journal.
Minneapolis Fed President Narayana Kocherlakota, a dove who wants to stand pat on rates until the second half of next year, said in an interview China’s slowdown heightens the risk of a US shock.
“There’s just no reason to go now,” he said.
The Fed decision has drawn unusually intense interest from both foreign central bankers, who will have to respond, and from people in the US on both the right and left.
The conservative American Principles Project held speeches at a nearby hotel urging a prompt rate hike. Meanwhile, a floor below the main Federal Reserve conference space, the Center for Popular Democracy hosted workers and economists calling on the Fed to keep rates low to get more people in the US back to work.
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