Riverwoods, Ill/Chattanooga, Tenn.: US Federal Reserve policymakers say they will wait to deliver more interest rate hikes until they have a better handle on whether slowing global growth and financial market volatility will undercut an otherwise solid U.S. economic outlook.
Residents of four of the 12 Fed regional banks on Wednesday said they wanted greater clarity on the state of the economy before extending the central bank's rate hike campaign any further.
Minutes of the Fed's December meeting, released on Wednesday, showed fellow policymakers widely shared that view, seeing risks from markets and abroad as making "the appropriate extent and timing of future policy firming less clear than earlier."
The message underscores a sense that the Fed is nearing the end of its rate-hike cycle. It also syncs broadly with the view of Fed Chairman Jerome Powell, who last week eased market concerns that the Fed was ignoring signs of an economic slowdown and assured markets he would be patient and flexible in policy decisions this year.
Stocks had suffered their worst December performance since the Great Depression. Other signs of tightening financial conditions had surfaced as well, including a sharp slowdown in issuance of corporate bonds.
"I think they have certainly changed their tune," said Eric Stein, a portfolio manager for Eaton Vance who attended Rosengren's talk. "If financial conditions continue to ease from here (as they have to start the year) and growth stays strong, I think they will still look to hike, but for now a wait and see approach is prudent."
Stocks extended a fourth straight day of gains on Wednesday as policymakers spoke and the minutes were released, partially reversing the precipitous drop in the fourth quarter of 2018.
Uncertainty prompts policymaker caution
Three of the four policymakers who spoke Wednesday " Charles Evans of Chicago, Eric Rosengren of Boston, and James Bullard of St. Louis " are voting members this year on the Federal Open Market Committee, the bank's 10-member policy-setting panel.
While Bullard has long opposed the Fed's rate hikes, the caution from Evans and Rosengren marked a shift in their views.
Evans, who has been among the most vocal backers of gradually tightening U.S. monetary policy, told reporters Wednesday he still believes the Fed will need to deliver three more rate hikes this year.
But, in his first public comments since November, he nodded to an array of "tough-to-read" factors highlighted by the recent market selloff. With inflation showing no signs of breaking above the Fed's 2-percent target, he said, "we have good capacity to wait and carefully take stock of the incoming data and other developments."
Rosengren similarly said he expects solid growth this year and said he suspects financial markets are "unduly pessimistic," and said in a Bloomberg TV interview he thinks the Fed will need to raise rates twice this year.
But in a break from speeches last year, when he emphasized the risks of allowing unemployment to stay below sustainable levels for too long, Rosengren on Wednesday highlighted potential threats to growth. He said he was taking on board the cautionary signals from markets, including rising bets on rate cuts.
"There should be no particular bias toward raising or lowering rates until the data more clearly indicate the path for domestic and international economic growth," Rosengren told the Boston Economic Club. "I believe we can wait for greater clarity before adjusting policy."
Call for patience
The Fed's own forecasts, released after the central bank's fourth 2018 rate hike in December, called for two more rate hikes this year.
Traders disagree. Short-term U.S. interest-rate futures are now pricing in less than a one-in-four chance of a rate hike this year, and about a one-in-four chance of a rate cut by next January.
The minutes of the Fed's December meeting released Wednesday provided a more nuanced view of the policy outlook.
While the voting members unanimously backed the December rate hike, they judged a "relatively limited amount of additional tightening likely would be appropriate". A few of the seven non-voting members of the panel opposed the rate increase.
And, in a strong indication the Fed may pause what has been a steady quarterly diet of rate increases, many of the entire group of 17 thought the Fed "could afford to be patient about further policy firming," the minutes showed.
December's rate increase marked the ninth increase of a quarter percentage point since December 2015, when the Fed began lifting interest rates from near zero, where they had been since the financial crisis in 2008.
St Louis Fed's Bullard, who has long been critical of the Fed's rate increases, told the Wall Street Journal that while the Fed had "a good level of the policy rate today," there was no rush to push them higher.
The fourth president to speak Wednesday, Raphael Bostic of Atlanta, said earlier this week that the Fed was likely to need at most a single rate increase this year.
On Wednesday he said his view was driven by conversations with business executives, who say they have become more defensive in preparing for slower growth by paying down debt and holding off on new plans.
Those conversations "are not consistent with the business sector ramping up," Bostic told the Chattanooga Area Chamber of Commerce. Bostic, who backed all four rate hikes in 2018 as an FOMC voter, does not have a policy vote on the panel this year.
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