Fed still plans rate hike this year, but not committed

A trader works on the floor of the New York Stock Exchange after the Federal Reserve chose not raise interest rates on Sept 17, 2015 in New York, United States.
A trader works on the floor of the New York Stock Exchange after the Federal Reserve chose not raise interest rates on Sept 17, 2015 in New York, United States.PHOTO: AFP

NEW YORK/MILWAUKEE (Reuters) - Two influential Federal Reserve policymakers on Friday reinforced Fed Chair Janet Yellen's message that an interest rate hike is coming by year's end.

Meanwhile one of the Fed's most dovish policymakers appeared to soften his opposition to that timing, a subtle shift that could pave a smoother way to the Fed's first rate hike in nearly a decade.

To be sure, New York Fed President William Dudley and Dennis Lockhart of the Atlanta Fed, speaking separately in New York, appeared doubtful they would have enough information in hand to lift rates by an Oct 27 to 28 policy meeting, suggesting the Dec 15 to 16 meeting is more likely.

They also clearly left the door open to waiting until 2016 if it looks like the US economy is threatened by a global slowdown.

"Based on my forecast, yes I am" expecting to raise rates this year, said Dudley, a close ally of Yellen who has a permanent vote on policy. "But it's a forecast, and we're going to get a lot of data between now and December. So it's not a commitment," he said on CNBC TV.

"There certainly is a risk that the economy evolves in a very different way than I expect, and obviously it would be totally inappropriate for me to not take that into consideration."

Chicago Fed Chief Charles Evans, who has long said he views waiting until mid-2016 a more "appropriate" approach, for his part downplayed the importance of the timing of liftoff so long as the Fed takes rates up very slowly.

"The precise timing for first increase in the federal funds rate is less important to me than the path the funds rate will follow over the entire policy normalization process," he said, suggesting the rate may need to still be below 1 per cent by the end of next year.

The central bank held off on a rate hike last month in the face of a slowdown in China and elsewhere, financial market turbulence and falling commodity prices. All of those could keep US inflation, now at 1.3 per cent, below the Fed's 2 per cent target.

Since then, disappointing September jobs growth has caused investors to sharply discount an October rate hike, and to give a December move about a 40 per cent probability, based on futures markets.

Lockhart, a well-respected centrist and a voter on the Fed's monetary policy committee this year, said the international slowdown and last month's weak US jobs report show there is "a touch more downside risk" to the US economy.

Therefore, he said, the Fed will need to monitor the strength of the consumer in coming weeks and months to decide whether to go ahead with the first rate hike in nearly a decade.

"The economy remains on a satisfactory track and ... I see a (rate) liftoff decision later this year at the October or December FOMC meetings as likely appropriate," Lockhart said of the policy-making Federal Open Market Committee.

"However the data are giving off varied signals, and there is more ambiguity in the current moment than a few weeks ago,"he added at a Society of American Business Editors and Writers conference.

This "calls for especially diligent monitoring of incoming data with particular attention to consumer activity." The latest reading on the world's largest economy, a slight drop in U.S. import prices last month, suggested on Friday that the rate of imported deflation is slowing.

A Fed rate hike would reverberate through financial markets globally, depressing foreign currencies and possibly sucking more capital out of emerging markets in particular.

FOCUS ON DECEMBER

Dudley said "it's possible" that the Fed could begin hiking later this month, though he questioned whether data between now and then would give it confidence.

Lockhart, who like Dudley and most other Fed officials once expected a rate hike around mid-2015, noted that the Fed would have more information on inflation, the labor market and consumer activity by December.

But he too kept a move in October on the table. "I hope to avoid the trap of letting one or two months'specific data overly influence my outlook for the economy overall," he said.

"The ambiguity of the moment reinforces the need to closely watch the vital signs of the economy over the coming weeks to determine if the outlook has changed."