Hilsenrath Story

August 19th, 2015 8:47 pm | by John Jansen |

Via the WSJ:

The Federal Reserve faces a potential cliffhanger about whether to raise interest rates at its September meeting, a decision that will test Chairwoman Janet Yellen’s ability to lead an uncertain policy-making committee.

Officials have signaled for months they intend to start raising short-term rates from near-zero interest before year-end. But they have provided no clear sign of having settled on whether to move at their next policy meeting Sept. 16-17. Minutes of their July 28-29 meeting, released Wednesday, underscored why the decision remains a close call.

“Most [officials] judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” the minutes said.

That passage might be read as a hint that officials saw a September rate increase in the cards, but the minutes showed officials had wide-ranging views about taking that step and several notable sources of trepidation.

The Fed has said it won’t move rates until it is more confident inflation will rise toward its 2% target after running below it for more than three years. “Some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term,” the minutes said.

Many political battles, set for the fall, may impact the Federal Reserve’s decisions on raising interest rates. WSJ’s Sudeep Reddy explains. Photo:AP

Some officials worried about moving prematurely and lacking tools to respond if unanticipated events caused the economy to falter, and also about risks from developments abroad, particularly slowing growth in China.

Staff economists advising Fed officials on the outlook lowered their forecasts for economic growth and inflation. A strengthening dollar is putting downward pressure on exports and lower oil prices are holding down inflation.

Yet there was pushback against hesitating. A number of officials argued that a rate increase could convey confidence to the world about the economic outlook and that the Fed needed to move in acknowledgment of the economy’s progress toward full health. The Fed has held its benchmark short-term interest rate near zero since December 2008 to bolster the economy through the financial crisis, recession and fitful recovery. (The minutes don’t name the officials holding certain views or provide the number of people sharing them.)

“A lot of credibility will be lost if they don’t move this year,” Richard Fisher, who retired as president of the Federal Reserve Bank of Dallas earlier this year, said in an interview Wednesday. Mr. Fisher said September would be a better time to move than waiting until the Fed’s December meeting because markets are prone to volatility as the year ends.

Events since the July meeting haven’t made the Fed’s decision any easier. The government’s report on July employment showed the labor market continued to register job gains, bringing the economy closer to the point of recovery that the Fed wants to see when it starts raising rates.

Other developments are giving Fed officials new reason for caution. At the July meeting they noted China’s stock-market declines; since then Chinese officials have allowed their currency to depreciate, a new source of concern about the growth outlook in the world’s second largest economy.

U.S. crude oil prices hit a six-year low Wednesday and U.S. stocks tumbled, boosting demand for ultrasafe U.S. government debt. The yield on the benchmark 10-year Treasury note fell to 2.129% from 2.196% on Tuesday and marks the yield’s lowest closing level since May 29. A gauge of 10-year inflation expectations in the bond market fell to the lowest level since January.

Officials speaking since the July meeting have sent conflicting signals about where the group as a whole is most likely to go.

In an interview with The Wall Street Journal earlier this month, Atlanta Fed PresidentDennis Lockhart said he was inclined to move in September. St. Louis Fed James Bullard said in an interview with Market News International on Wednesday that he would push for a September move.

But in an opinion piece written in the Journal on Wednesday, Minneapolis Fed President Narayana Kocherlakota said it would be a mistake to raise rates with inflation still soft, and Fed governor Jerome Powell said earlier this month that a decision hadn’t been made.

With officials moving in different directions and a tough call to make in September, Ms. Yellen will, more than at any time in her 19-month tenure as the Fed’s leader, be the driving force behind the next decision.

“She is the chair and the leader and if there is indeed a division amongst the committee she will have to forge a decision. That’s her job as chair,” Mr. Fisher said. “In my opinion, her legacy will be determined by how she engineers the exit and normalization,” he said, referring to the process of raising interest rates toward more normal levels.

In earlier positions as San Francisco Fed president and Fed vice chairwoman, Ms. Yellen staked out clear ground as a policy “dove” strongly supportive of the Fed’s easy money policies. Given that history, she might be expected to favor keeping rates near zero for a while longer.

However, as chairwoman, Ms. Yellen has worked as a consensus builder who brings together disparate views on the Fed’s policy-making committee, which currently has 17 of 19 seats filled. She has prevailed over unanimous votes all year.

Adding to uncertainty for markets, Ms. Yellen won’t be attending the central bank’s annual retreat in Jackson Hole, Wyo., next week, where past Fed leaders have at times left clues about future policy decisions. Ms. Yellen is spending parts of the month of August vacationing out of Washington.

Uncertainty about the September decision is palpable in financial markets. Futures markets put a 45% probability on a Fed move in September according to the Chicago Mercantile Exchange, a near tossup in the mind of investors.

Some investors and analysts just want the Fed to get it over with after months of buildup.

“What are you worrying about, September or December? It doesn’t matter. Just pull the trigger,” said former Fed governor Laurence Meyer, co-founder of Macroeconomic Advisers, a research firm, in an interview before the release of the minutes.

Fed officials have said their decision about when to raise interest rates will depend on the economy’s health and many want to see all available data before making a decision.

The minutes suggested some officials want the Fed to raise rates and then wait a significant period of time before moving again, though they didn’t indicate this was a consensus view.

“Some participants expressed the view that, in light of their current outlook, it likely would be appropriate to adjust the federal funds rate gradually after the first increase to help ensure that the economy would be able to absorb higher interest rates and that inflation was moving toward the committee’s objective,” the minutes said.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com

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