Daily Management Review

Following Brainard Warning, Fed Looks Unlikely to Hike Rates Next Week


09/13/2016




Following Brainard Warning, Fed Looks Unlikely to Hike Rates Next Week
In comments that solidified the view the central bank would leave interest rates unchanged next week, Fed Governor Lael Brainard said that the Federal Reserve should avoid removing support for the U.S. economy too quickly.
 
Brainard said that the United States still looked vulnerable to economic weakness abroad and that she wanted to see a stronger trend in U.S. consumer spending and evidence of rising inflation before the Fed raises rates.
 
"Today's new normal counsels prudence in the removal of policy accommodation," Brainard, one of six permanent voters on the Fed's rate-setting committee, told the Chicago Council on Global Affairs.
 
"The case to tighten policy preemptively is less compelling," she said for the fact that the U.S. labor market was not yet at full strength.
 
She held firm in arguing for caution in what could be the last word from a Fed policymaker before the central bank's Sept. 20-21 meeting, even though Brainard did not comment on the specific timing of future rate policy changes.
 
Some policy makers which includes Brainard, has argued that the Fed should not rush to raise rates while another camp is concerned current low rates will fuel a surge in inflation and hence it is most likely that policymakers will go into the meeting divided.
 
Fed Chair Janet Yellen argued in July the case for rate increases has strengthened as many other policymakers think the U.S. job market is near full strength.
 
"I think circumstances call for a lively discussion next week," said Atlanta Fed President Dennis Lockhart. He will not be a voter at next week's policy review but will participate in discussions.
 
Without putting pressure on inflation, the labor market might still tighten further, Brainard said on Monday.
 
"The response of inflation to unexpected strength in demand will likely be modest and gradual, requiring a correspondingly moderate policy response," she said.
 
While the dollar weakened and yields on U.S. government debt fell, U.S. stock prices rose following Brainard's comments. According to CME Group, traders trimmed their odds for a September rate hike to 15 percent from 24 percent on Friday. However, just a higher than 50/50 odd for a December hike is still viewed by investors.
 
Ending seven years of near-zero rates, the central bank last raised borrowing costs in December. Policymakers could still hike rates twice in what remained of 2016, they signaled in June.
Arguing the United States is vulnerable to economic troubles in Asia and Europe, Brainard has been one of the Fed's most vocal defenders of low interest rate policy over the last year.
 
The United States could be more vulnerable to spikes in the value of the dollar due to the low interest rate policies across advanced economies, which could put downward pressure on inflation, she said on Monday.
 
The Fed was keeping interest rates low because of political pressure from the Obama administration, Republican Presidential candidate Donald Trump accused the Fed on Monday.
 
(Source:www.reuters.com) 






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