NY Fed chief says rate hike ‘less compelling’

Washington—The head of the New York Federal Reserve Bank (NY Fed) said he’s less inclined to support a Fed rate hike in September amid recent global turmoil, including falling oil prices and a slowdown in China. 

William Dudley said the developments pose downside risks for the US economy and have fueled market volatility.

Consequently, the case for the Fed to hike interest rates in September for the first time in nearly a decade is “less compelling to me than it was a few weeks ago,” Dudley said.

Dudley serves as the No. 2 official on the Federal Open Market Committee (FOMC), the Fed panel that sets interest rates. His comments are often viewed as a guide to the thinking of Fed Chairman Janet Yellen and other officials who have backed her efforts to keep interest rates at record lows for an extended period to boost US economic growth.

There had been a widely held view among private economists that the Fed would likely move to raise interest rates when it meets in September. But growing worries about economic prospects in China, the world’s second largest economy, triggered a big selloff two weeks ago and early last week on Wall Street. The market turbulence has raised doubts about the likelihood of a September move.

The Fed has kept a key interest rate at a record low near zero since December 2008.

“At this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago, but normalization could become more compelling by the time of the meeting as we get additional information on how the US economy is performing and more information on international and financial market developments,” Dudley said.

Dudley, meeting with journalists to discuss the economic outlook for the United States and the New York region, cautioned against overreacting to the sharp stock price declines until it becomes clear whether they represented a temporary adjustment or a longer-term trend with more serious economic implications.

Last Wednesday (last Thursday in Manila), stocks rallied to recoup part of the huge losses incurred in previous sessions. The Dow Jones industrial average jumped 619 points, and the Standard & Poor’s 500 index surged 3.9 percent—its best performance in almost four years. The market was rebounding from a six-day slump that had wiped trillions of dollars off the value of US stocks.

Dudley said international developments had exacerbated the strains faced by many emerging market economies, which “could lead to a slower global growth rate and less demand for US goods and services.”

Asked what it would take for him to back a rate hike later in the year, Dudley reiterated the Fed’s stance in recent policy statements: It needs to see further improvement in the US labor market and be “reasonably confident” that inflation is moving toward its 2-percent target for annual price increases.

Inflation has been running below that level for the past three years and has recently slowed further amid a strong dollar and lower oil prices.

Wall Street investors will turn their attention next to upcoming remarks by Fed Vice Chairman Stanley Fischer, who was to speak last Saturday at the annual gathering of Fed officials at Jackson Hole, Wyoming. AP