2 Fed officials think data will justify rate hike this year

11 Oct 2015 | Author: | No comments yet »

Dollar braces for inflation test after worst week since June.

The head of the Federal Reserve Bank of New York said Friday that a Fed rate hike remains likely this year but that a final decision will depend on how the economy performs. William Dudley, president of the Fed’s New York regional bank, and Dennis Lockhart, president of the Atlanta Fed, said that despite pressures from abroad, they thought the economy would keep performing at a solid enough pace to justify a rate hike at one of the Fed’s final two meetings of the year.

A decline may cast further doubt on Federal Reserve plans to raise interest rates this year and undermine the US currency, which fell the most in four months this week, paring a 2015 advance. But he said the economy will need to further improve for the Fed to raise rates from record lows. ”There’s certainly a risk that the economy evolves in a different way than I expect, and obviously (it would) be totally inappropriate for me to not take that into consideration in terms of what I think is appropriate for monetary policy,” Dudley said. Spurring the losses, minutes from the Fed’s latest meeting showed policymakers discussing the damping effect of dollar strength on inflation and exports, while repeating their intention to lift the overnight target. “Investors have kind of disregarded the jawboning from the Fed and the rhetoric from the Fed and are really looking at the data,” said Chris Gaffney, president at EverBank World Markets in St. Evans is among the Fed’s ”doves” – officials who worry more about threats from economic weakness than do ”hawks,” who focus more on the risk that inflation could run too high. Hedge funds and other money managers cut net bullish bets on the dollar to the lowest in more than a year, according to data from the Commodity Futures Trading Commission.

The data will include jobs reports for October and November, inflation data for September and October and the government’s first two estimates of economic growth in the July-September quarter. The 2015 rally has stalled as investors push out bets on a Fed interest-rate increase following the central bank’s September decision to hold its target near zero amid market volatility. The most recent employment report showed that employers cut back sharply on hiring in September and added fewer jobs in July and August than previous thought. ”If you look at the U.S. economy right now, you see a pretty strong domestic economy,” he said.

The trouble, he said, is that this strength is being offset somewhat by global weakness, including a slowdown in China, and a stronger U.S. dollar, which is hurting U.S. exports. Consumer prices probably fell 0.2 per cent in September from a month earlier and 0.1 per cent from a year earlier, according to the median forecast in a Bloomberg survey.

He noted that these reports followed a turbulent August in which concerns about China’s slowdown sent stock prices plunging. ”While I have not changed my basic outlook, very recent data have not provided much confirmation that my narrative still holds,” Lockhart said in a New York speech to the annual meeting of the Society of American Business Editors and Writers. ”I perceive a touch more downside risk today than I saw some weeks ago.” The Fed has kept its key rate at a record low near zero since 2008. The Fed targets inflation of about 2 per cent. “There is no inflationary pressure — plain and simple,” said Alessio de Longis, a money manager in the global multi- asset group at OppenheimerFunds Inc in New York. “We have a serious risk of ongoing dollar weakness for the rest of the quarter.” The three officials are among five regional bank presidents with a vote this year on the panel of Fed bank presidents and board members that meets eight times a year to set interest rate policy.

But he cautioned, ”That view is not immutable and will respond to economic developments over time.” Many economists say the weak jobs report for September makes a rate increase more uncertain. But Fed officials, including Chair Janet Yellen, have stressed that the rate increases will likely be very gradual, meaning that rates would still remain near historic lows for a while.

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