Rosengren’s Comments Dampen Hopes of Fed’s Interest Rate Hike

Federal Reserve Bank of Boston President Eric Rosengren said turmoil in financial markets and weak global growth could slow progress toward the Fed’s policy goals and may delay the need for additional interest-rate increases.

“Most policymakers thought that the extent to which tighter conditions would persist and what that might imply for the outlook were unclear, and they therefore judged that it was premature to alter appreciably their assessment of the medium-term economic outlook”, the minutes said.

While growth in China’s economy, the world’s second-largest, may have slowed to as little as 3% and oil has plummeted 18% this year, the Fed has described the US economy as generally resilient.

The Fed in mid-December published forecasts suggesting four more rate hikes would come this year.

Concerned that the global slowdown will affect the United States, many economists now expect the Fed to raise interest rates only twice this year, starting in June. The economy created 151,000 jobs in January, pushing the unemployment rate down to an eight-year low of 4.9 percent. “While it has been a very rocky start to the New Year, the Fed is a long way from capitulation”, the Bank of America analysts wrote, arguing that the Fed’s most likely course of action is to simply delay further rate hikes rather than pivot back to monetary easing. Both of those developments could make it harder for the Fed to achieve its inflation target.

But Harker said falling energy prices and the appreciation of the dollar are some of the major factors that keep inflation low.

In her testimony to Congress last week, Janet Yellen, chairman of the Fed, noted that “the economic outlook is uncertain”. “It might be prudent to wait until the inflation data are stronger before we undertake a second rate hike”, said Harker at an economic conference in Newark, DE.

The minutes also showed the Fed’s policy-setting committee reauthorized foreign currency swap arrangements with a number of other central banks.

“If financial headwinds dissipate quickly and inflation picks up a bit more aggressively, it will require a slightly more aggressive approach to policy”, he said.