27 October 2016
US short-term interest rates are expected to remain near zero after soft first-quarter economic data dampened Fed expectations of a June rate hike. Photo: Bloomberg
US short-term interest rates are expected to remain near zero after soft first-quarter economic data dampened Fed expectations of a June rate hike. Photo: Bloomberg

Fed dampens June rate hike hopes

Expectations of a June increase in short-term interest rates in the United States have subsided after soft first-quarter economic data created uncertainty in the Federal Reserve.

A slowdown in March hiring, tepid growth in consumer retail spending, a big drop in industrial output and weak home building reinforced fears the US economy is slowing, the Wall Street Journal reported Friday.

Fed officials want to see continued improvement in the job market and inflation is rising toward their 2 percent goal before they raise rates from near zero.

Most of them see the first-quarter growth slowdown as temporary but they will need time to make sure a rebound is in store.

“Data available for the first quarter of this year have been notably weak,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said Thursday in a speech in Palm Beach, Florida

He is the data gave rise to “heightened uncertainty about the track the economy is on.”

Lockhart often reflects a middle ground among Fed officials when they are divided on policy questions.

In February, he said he wanted to keep open the possibility of a rate increase by June but made no mention of a June move in his speech Thursday.

He said “affirmative evidence” that the Fed is reaching its goal of 2 percent inflation is not likely in the very near term.

Speaking to reporters after his speech, he said June is not off the table but it also it is not his preference.

For Fed officials, the turn of events is somewhat of a recurring nightmare.

Economic growth has continually fallen short of their expectations in an expansion nearly six years old.

The disappointments, in turn, have consistently forced them to recalibrate their plans.

Many officials entered this year thinking the economy was finally on a stronger growth path after several strong months in 2014 and signs that headwinds related to the financial crisis were receding.

As a result, they started looking toward an initial rate increase at mid-year.

The Fed has held its benchmark short-term rate near zero since December 2008 to boost the growth during the recession and weak recovery.

At the Fed’s March meeting, they opened the door to considering a rate increase in June, but even before the recent spate of weak numbers, they were divided on whether action would be warranted by then.

In London, Boston Fed president Eric Rosengren said “it remains difficult to separate the temporary and easy-to-explain from the lasting and more concerning—so in my view, incoming data would need to improve to fully satisfy the [Fed’s] two conditions for starting to raise rates.”

Some officials who appeared inclined to move by June are giving themselves wiggle room.

Cleveland Fed president Loretta Mester told The Wall Street Journal in February that a mid-year move was a “viable option”.

In a speech Thursday, she stuck to her optimistic outlook for the economy but conditioned a decision to act on signs that growth is “regaining momentum.”

The barrage of comments came after New York Fed president William Dudley earlier this month said weak economic data had raised the bar for rate increases by mid-year.

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