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 At the same time, the chiefs of two regional Fed banks signaled they
are watching inflation closely and the potential impact of falling
inflation expectations on monetary policy.
The influential chief of the New York Fed warned that slumping oil
prices <CLc1> <LCOc1> and a strong dollar <.DXY> have raised the
risk of U.S. inflation expectations heading lower, hampering actual
inflation from reaching the U.S. central bank's 2-percent goal.
"With respect to the risks to the inflation outlook, the most
concerning is the possibility that inflation expectations become
unanchored to the downside," New York Federal Reserve President
William Dudley told the New Jersey Bankers Association.
Still, he said, "as long as the economy continues to grow at an
above-trend pace, I expect the increase in resource utilization will
be sufficient to push both inflation and inflation expectations
higher over time."
LATER RATE HIKES?
The Fed raised U.S. policy rates for the first time in nearly a
decade in December, and signaled they expect four rate hikes this
year.
Traders are doubtful. They see the Fed raising rates only once this
year, and not until June, based on trading in short-term
interest-rate futures.
Global stock markets continued their 2016 nosedive on Friday as
investors braced for a third straight week of losses sparked by
worries over a slowdown in China's economy and the drop in oil
prices.
Weak U.S. economic data added to the gloom, with falling December
retail sales and industrial production suggesting economic growth
braked sharply last quarter.
The Atlanta Fed said it now expects fourth-quarter U.S. gross
domestic product growth of just 0.6 percent, well below the
economy's long-run growth potential.
FED SHRUGS OFF MARKETS
But both Dudley and San Francisco Fed chief John Williams downplayed
the effect of the stock-market decline on Friday.
"The short-term volatility is not something that worries me for
monetary policy; it reflects market participants trying to make
sense of global developments," Williams told reporters on Friday,
adding that he sees no signs of distress or a weak economy in
declining asset values, and is unsurprised that stock prices <.SPX>
would decline as the Fed raises rates.
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"I think this year will probably be in many ways challenging around
this issue: that market expectations may move around in ways that
don’t reflect actual expectations of the Fed," he said.
Though markets have all but ruled out a January rate hike, Williams
refused to, saying he approaches every meeting with an open mind.
"The decision whether we raise rates in January, March, April, June
or whatever, ... is not nearly as important for the economy as where
the path of interest rates is going," Williams said.
While the Fed had early last year thought that low oil prices would
spur more consumer spending, bigger-than-expected declines are
fueling concerns that inflation will remain stalled below the Fed's
2 percent target.
Williams said the dollar had strengthened more, and oil prices dove
deeper, than he had expected, largely explaining the continued
downward pressure on inflation.
Some surveys have pointed to a softening in inflation expectations,
including the University of Michigan's measure of the long-term
consumer inflation outlook which is near the bottom of its range in
the past 20 years. Market-based measures of inflation expectations
have also declined.
Despite concerns about disinflation, Dudley said he expects the U.S.
economy to grow slightly above 2 percent in 2016 with a bit more
tightening in the labor market.
(Reporting by Richard Leong and Ann Saphir; Editing by Meredith
Mazzilli and James Dalgleish)
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