Fed officials cited global risks in advising caution

Federal Reserve chair Janet Yellen has signalled this message: To assure the expansion stays on track, policy will respond to growth threats as much as it does to actual data.
Federal Reserve chair Janet Yellen has signalled this message: To assure the expansion stays on track, policy will respond to growth threats as much as it does to actual data.PHOTO: AGENCE FRANCE-PRESSE

WASHINGTON • Federal Reserve officials last month held a vibrant debate that pitted the steady US expansion against heightened global risks and reached a broad agreement on a go-slow strategy that reduced the odds of a rate increase in the first half of the year.

"Several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate," showed minutes of the Federal Open Market Committee's (FOMC) March 15 to 16 meeting released on Wednesday in Washington.

"In contrast, some other participants indicated that an increase" in the federal funds rate target range at the April 26 to 27 meeting "might well be warranted" if economic data came in as expected, according to the minutes. "A couple" wanted a rate hike at the March meeting, including Kansas City Fed president Esther George.

United States central bankers in March also lowered their estimate for rate hikes this year to two quarter-point moves from four in December, with nine of 17 officials holding that view. The minutes confirmed Fed chair Janet Yellen's message from her post- meeting press conference and a subsequent New York speech just last week: To assure the expansion stays on track, policy will respond to growth threats as much as it does to actual data.

Investors marked down the probability of a rate increase by the FOMC's June meeting, following the release of the minutes. The chances are seen now as below 20 per cent, according to trading in futures linked to the federal funds rate.

"Risk management considerations" helped "produce a broad consensus on the Federal Open Market Committee even among people who are more optimistic about growth", said BNP Paribas senior US economist Laura Rosner. "They're able to pull together and agree this policy decision was appropriate."

Fed officials met as financial markets were recovering from the depths of a selloff early this year that rattled global leaders and boosted US recession risks.

The minutes showed committee members considered a number of distinct risks, with a softening outlook for global growth and the ensuing volatility in financial markets chief among them.

"Many participants expressed a view that the global economic and financial situation still posed appreciable downside risks to the domestic economic outlook," according to the minutes. "The possible adverse effects on investment spending of concerns about global growth and the associated volatility in financial markets were also noted."

The consideration of global conditions in US policymaking gives Fed officials even more discretion, said Jefferies chief financial economist Ward McCarthy in New York.

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A version of this article appeared in the print edition of The Straits Times on April 08, 2016, with the headline 'Fed officials cited global risks in advising caution'. Print Edition | Subscribe