|
 Yellen's arguments against potential dissenters at the Dec. 15-16
Fed policy meeting were strengthened by Labor Department data on
Friday that showed employers hired 211,000 people in November while
even greater numbers joined the workforce.
Federal funds futures contracts imply a 79-percent chance that the
Fed will end seven years of near-zero interest rates at its December
meeting and about even odds of a second rate rise by March.
Beyond that the outlook is more mixed. Interest rate futures
maturing in the second half of next year are rising slightly,
showing traders are wagering the Fed will manage no more than two
further hikes before the end of next year.
The differences among Fed policy makers were on display at a
Philadelphia Federal Reserve conference on Friday where Narayana
Kocherlakota, in his last speech as president of the Minneapolis
Fed, gave a sharp critique of a central bank that he said was too
anxious to begin raising rates and thus would fail to create perhaps
millions of jobs in a timely manner.
James Bullard, the more hawkish head of the St. Louis Fed, followed
that presentation with one that argued it is time to raise rates and
to begin shrinking the central bank's $4.5 trillion balance sheet
which was bulked up in recent years to boost the economy.
"You have an open debate between doves and hawks as to what the pace
of increases should look like," said Art Hogan, chief market
strategist at Wunderlich Securities in New York, referring to the
divisions within the Fed over readiness to tighten monetary policy.
The Fed has appeared gun shy on tightening policy twice already this
year, in June and September. Its key policy rate has been 0-0.25
percent since the depths of the financial crisis in late 2008.
MIXED MESSAGES
Wall Street's top banks said in a Reuters poll on Friday that they
expect the central bank to maintain a slow pace of rate hikes, with
the median forecast for the fed funds rate for mid-2016 about 0.75
percent and 1.125 percent for the end of the year.
The Fed's policymakers hold very different views of where the
central bank's benchmark rate will end next year, ranging from less
than zero to 3.0 percent, according to projections released in
September that were based on their views of appropriate policy. The
median outlook was for four quarter-point rises next year, while
their views of the long-term normal level range from between 3.0
percent and 4.0 percent.
[to top of second column] |
Worryingly for a consensus-seeking Yellen, it is not just
traditional "doves" such as Governor Lael Brainard who are
questioning the pace of rate rises. Even some of the hawks, who
would typically worry more about inflation risks than weak economic
growth, are weighing a possibility that they may face a long spell
of below normal economic growth and low inflation.
Bullard noted that rates have remained low in most advanced
economies. If that persists it "may be leading us to an outcome with
low nominal interest rates and low inflation that can last for a
very long time," he said, adding the Fed needs to be willing to
pause and also to speed up its pace of tightening.
Earlier this week, Yellen said the process of rate increases could
be gradual but she has yet to spell out what gradual means.
One driver for the pace of rate rises will be whether inflation
picks up next year, and Friday's data suggested workers might not be
getting big enough raises for businesses to raise prices much.
Average hourly earnings rose 2.3 percent in November from a year
earlier, down from 2.5 percent in October. Without more inflationary
pressures, policymakers likely want to raise rates more gradually.
Friday's jobs report also highlighted Brainard's argument that
weakness in the global economy could constrain U.S. growth more than
policymakers currently expect. Manufacturing jobs, which are among
the most exposed to the global economy, actually fell by 1,000 in
November, the third drop in the last four months.
"While this report can help justify a rate hike in December, it
can't justify anything more than a very gradual path of rate hikes,"
said Brian Jacobsen, a portfolio strategist at Wells Fargo Funds
Management in Menomonee Falls, Wisconsin.
(Additional reporting by Ann Saphir in San Francisco, and Dion
Rabouin and Rodrigo Campos in New York; Editing by David Chance and
Chizu Nomiyama)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
