Stability concerns focus
at Fed ahead of Yellen speech
Send a link to a friend
[August 19, 2017]
By Howard Schneider
WASHINGTON (Reuters) - The stock market's
steady rise, still low long-term bond yields and a sagging dollar are
girding the Fed's intent to raise interest rates again this year despite
concerns about weak inflation, according to comments this week from Fed
officials and analysts anticipating remarks next week by Chair Janet
Minutes of the July Federal Open Market Committee meeting released this
week flagged a division among policymakers focused on weak inflation as
a reason to stall further rate increases and those who feel still loose
financial conditions pose a risk the Fed needs to counter.
Two officials this week, including vice chair William Dudley who has in
the past taken a more dovish approach to policymaking, said the fact
that financial conditions have recently eased despite Fed rate increases
is a reason to keep plans to tighten policy in place.
When the Fed said Thursday that Yellen next week would use a keynote
speech at Jackson Hole to address "financial stability," it was a clue
to some that she may agree.
"I would not be surprised to see Chair Yellen outline a similar argument
at Jackson Hole -- namely, that financial conditions are a piece of the
puzzle that currently support maintaining a gradual pace of tightening,"
analysts from NatWest Markets Strategy wrote in a morning note.
TD Securities analysts said they expect Yellen's comments to be more
neutral, but that her speech could yield a "hawkish" surprise if "she
elevates concern about financial stability as a factor that would
warrant a more aggressive path of rate hikes."
Yellen spoke to the issue in June and did not sound overly concerned.
Asked directly about whether the easing of financial conditions might
warrant faster rate increases, she noted that the state of financial
markets was only one factor in the set of information the Fed used in
"We have certainly noticed the stock market is up considerably over the
past year," she said. But "we're not targeting financial
conditions...We're trying to generate paths for employment and inflation
that meet our mandated objectives."
[to top of second column]
Federal Reserve Chair Janet Yellen delivers semiannual monetary
policy testimony during a House Financial Services Committee hearing
on Capitol Hill in Washington, U.S. on February 15, 2017.
REUTERS/Yuri Gripas/File Photo
The most recent forecasts by Fed officials showed policymakers expect to raise
rates once more this year, likely in December, while in the meantime beginning
to reduce the size of the asset holdings accumulated during the economic crisis.
Taken together, the steps would add upward pressure on both short-term borrowing
costs and the longer-term rates critical to business and household investment
Recent weak inflation data have led some at the Fed to argue those plans - at
least the expected rate increase - need to be put on hold until it is clear the
economic recovery remains durable and that the pace of price rises will move
towards the Fed's two percent target. They are currently about half a percentage
point below that.
The counter: policy remains loose, and the fact that financial conditions have
eased even as the Fed has raised rates gives the central bank leeway to tighten
policy further without much risk of slowing the economy. Long-term bond rates
have been edging lower recently, and coupled with strong corporate earnings that
has pushed stocks higher. The fact that the rest of the world economy is doing
better, particularly the eurozone, has meant looser financial conditions as well
in the form of a cheaper dollar.
In the minutes, the views of "one participant" were singled out noting that a
slow but continued tightening of policy, in the current environment, "would
likely strike the appropriate balance" among committee members worried about
financial excesses and those focused on inflation.
Cleveland Fed President Loretta Mester said in a Reuters interview this week
that even with inflation weakening, the Fed should think "preemptively" about
how continued loose financial conditions may turn into problems down the road.
"We do have relatively easy financial conditions. That is another reason you
want to continue on this gradual retraction of accommodation," through higher
short term interest rates and a shrinking balance sheet, she said. "It we don't
we could be engendering some imbalances in the financial markets."
(Reporting by Howard Schneider; Editing by Chizu Nomiyama)
[© 2017 Thomson Reuters. All rights
Copyright 2017 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.