The likelihood of the Fed moving to raise its benchmark rate next month for the first time in 10 years seems “less compelling,” said one Reserve official Wednesday.
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.
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.
Two regional Federal Reserve presidents who will vote on policy next year said that while they are mindful of market volatility, they consider the U.S. economy strong enough to justify raising interest rates.
“Inflation expectations have been relatively stable, we have growth, above-trend growth, we have labor-market improvements continuing,” the Cleveland Fed’s Loretta Mester told Bloomberg Television Friday at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming. “My view so far in looking at all of the factors is that the economy can sustain an increase in interest rates.”
“The key question for the committee is — how much would you want to change the outlook based on the volatility that we’ve seen over the last 10 days, and I think the answer to that is going to be: not very much,” Bullard said.
Their remarks came two days after New York Fed President William C. Dudley said market turbulence made the case for a September liftoff “less compelling to me than it was a few weeks ago.”
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