NEW YORK: An interest rate hike next month seems less appropriate given the threat posed to the US economy by recent global market turmoil, an influential Federal Reserve official said yesterday.
In the clearest indication yet that fears of a Chinese economic slowdown could influence US monetary policy, New York Fed President William Dudley (pictured) said the prospect of a September rate hike “seems less compelling” than it was only weeks ago. Dudley, a dovish policymaker and close ally of Fed Chair Janet Yellen, however left the door open to raising rates for the first time in nearly a decade when the US central bank holds a policy meeting September 16-17.
The global selloff, brought on by weak Chinese economic data, threatens to crimp global growth and create financial conditions unsuitable for a initial policy tightening in the United States, he said. “At this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” Dudley told reporters at the New York Fed, of the policy-making Federal Open Market Committee.
But an initial rate hike “could become more compelling by the time of the meeting as we get additional information on how the US economy is performing and (on) international financial market developments, all of which are important to shaping the US economic outlook,” he said.
Market turmoil in recent days, including steep stock sell-offs in Asia, Europe and the United States, has called into question the Fed’s plans to raise rates possibly as soon as next month. Investors and economists have pushed out their expectations for the Fed to move in December or next year, citing the rising dollar and falling oil prices.
The comments, which lifted the dollar and US Treasury bond prices, come a day before many of the world’s top central bankers gather at an annual conference in Jackson Hole, Wyoming, to which investors will look for clues on how the turmoil could rattle monetary policy plans.
Dudley’s comments were unprompted and made at a briefing on the regional economy, suggesting they were a deliberate message from the broader Federal Reserve.
He said he wanted to see more US economic data, and also how markets behave in coming weeks, before making a final judgment on the timing of policy tightening.
“International developments have increased the downside risks to US economic growth somewhat,” he said, with China’s slowdown and falling commodity prices straining emerging markets and raising the possibility of slower global growth and less demand for US goods and services. The volatility has tightened financial conditions and widened credit spreads, he said, adding inflation remains “well below” the Fed’s 2 percent target due to falling oil prices and the strength of the dollar, “which we expect to be transitory.”
“It’s important not to overreact to short-term market developments because it’s unclear whether this will just be a temporary adjustment or something more persistent that will have implications for U.S. growth and the inflation outlook,” Dudley said. Only a “large and prolonged” stock market drop could potentially weigh on Americans’ willingness to spend, he added.
Reuters
