|
 The harder call, and one increasingly preoccupying U.S. central
bankers, is how fast to move after that, navigating stuttering
global growth and nervous markets on the Fed's long journey back to
pre-crisis policies.
Betting on the "lift-off" of rates from near-zero has become less of
a gamble, particularly after an exceptionally strong jobs report
last Friday. After months of wavering as the global economy appeared
to weaken, investors have pegged that first rate rise to the middle
of next year, and seem to have accepted that the U.S. economy can go
its own way.
Recent conversations with Fed policymakers, staff and economists
point to an internal debate shifting from the first rate move to the
pace of increases thereafter. Stagnant inflation has become less of
a concern in light of continued improvement in labor markets.
Barring a serious shock, policymakers have indicated they will press
ahead with liftoff in coming months, then move cautiously to ensure
they do not stifle the recovery by acting too fast.
"Getting started is probably helpful... Otherwise you keep deferring
and keep deferring and then the market just keeps pushing this
further out... You want to break the glass," said one former Fed
official familiar with the debate. From that point on "if inflation
stays low you can be in a little bit less of a rush... You don't
have to go every meeting."
That sentiment is taking root at the Fed and narrowing the
differences among the 7 governors and 12 regional bank presidents,
who only a few months ago appeared broadly split over issues such as
the amount of slack in the labor market. Fed officials will update
their forecasts after meetings that conclude on Dec. 17, possibly
marking a further convergence of their views.
Naturally, some disagreement remains. Inflation hawks feel the Fed
should be acting sooner to prevent crisis-era stimulus feeding into
asset price bubbles and excessive price increases. Others, most
notably Minnesota Fed chief Narayana Kocherlakota, worry the central
bank is too complacent about a risk of inflation fading. A financial
crash in China or some other shock could also turn the Fed's
timetable on its head.
But with an economy less dependent on trade and with strengthened
banks, the United States looks more robust than recession-prone
Japan and Europe. More jobs, rising wages and stock prices and other
positive domestic news, meanwhile, may set the stage for households
to play a larger role in the recovery.
"Everything is coming together for pretty solid consumer spending
growth," said Mark Zandi, chief economist at Moody's Analytics.
Even the Fed's more cautious members are eager to deliver a modest
rise in the benchmark rate, according to interviews with officials,
staff and analysts. A zero interest rate leaves policymakers no
simple way to react if conditions weaken; it is also increasingly
out of step with data that has boosted the Fed's confidence about
the economy's momentum.
In fact, central bankers have become so confident that even a clear
acceleration in prices is no longer seen as a precondition to
liftoff, Fed policymakers and staff have indicated in interviews and
public statements.
[to top of second column] |
There is wide recognition that cheaper oil and the strength of the
dollar, for example, mean the Fed's preferred inflation measure may
remain stuck at around 1.5 percent in coming months. That is
considered far below the central bank's 2 percent target given the
glacial pace at which U.S. prices and wages are now thought to move.
BEYOND OIL
In a recent series of interviews with Reuters and in public
statements, policymakers have said they are trying to look beyond
oil's direct impact on inflation to other factors that will
ultimately drive prices and wages higher. Cheaper oil is likely to
dampen energy sector investment and hiring in the short-run, for
example, but over time will boost overall demand, perhaps boost
profits and hiring among other firms, and ultimately produce
stronger growth. Fed officials are also looking for confirmation of
longer term price and wage trends in factors such as capacity
utilization, job turnover, the time it takes to fill jobs, and a
range of surveys and measures of inflation expectations.
“We may have to disentangle short term influences of energy prices
from the underlying trend... But I really do believe we will see the
underlying core pace of inflation accelerate,” Atlanta Fed President
Dennis Lockhart told reporters last week. Lockhart, a centrist
member who will have a vote next year on the Fed's policy committee,
said that while a mid-2015 lift-off was not "carved in stone," he
saw the data increasingly backing that scenario.
Now the question is where rates will be at the end of 2016 or even
farther into the future. The initial hike, probably a small, quarter
point move, may have little effect on what companies or consumers
pay for credit, the patterns of lending among banks, or cross-border
capital flows. But the quicker the Fed moves from there, the faster
will be the adjustments and the greater the potential for
dislocation.
Indeed if Fed policymakers and the markets are coalescing around
liftoff, they remain far apart about what happens next. The most
recent projections by Fed officials, provided in September,
anticipate a median federal funds rate of 3.75 percent by the end of
2017. However, some futures contracts show investors do not expect
the benchmark rate to reach such levels until well into the 2020s.
As Fed chief Janet Yellen and other Fed officials have noted, that
gap could reflect a number of things - from divergence in economic
forecasts to differing views about how the Fed may respond to
economic data. Some analysts have noted, for example, that Fed
economic projections have tended to be optimistic; others speculate
that Yellen's personal rate projection is probably on the lower end,
and weight their predictions to account for her more influential
voice.
(Additional reporting by Michael Flaherty and Jonathan Spicer;
Editing by Tomasz Janowski)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
