Federal Reserve ‘to keep rates low’ on poor data

With little evidence that the US economy is rebounding after a very weak first quarter, the Federal Reserve is in no position to start raising interest rates for the first time since 2006, a top Fed official said yesterday.

“I would like to normalise [rates] as soon as possible but the conditions haven’t been right,” said Boston Fed president Eric Rosengren.

He said there are side effects to keeping rates low for a long time. “In some sense, when we start raising rates that’s good news,” said Rosengren.

The Fed has said it will only raise rates when it sees further improvement in the labour market, and is reasonably confident that inflation is headed back to the Fed’s 2% target.

However, with growth in the first half of the year likely to run below the economy’s potential of about 2%, Rosengren said: “I do not expect to see timely improvements in the unemployment rate and sufficient progress towards the 2% inflation target.

“This, in my view, makes a compelling argument for continued patience in monetary policy.

“I’m worried about what’s happening in Europe.”

Athens and its eurozone and IMF creditors are in talks over Greece’s debt and aid money, and without a deal, Greece could soon default or go bankrupt.

“If there was a disorderly outcome in Europe it would have an impact on New England,” Rosengren said.

A slowdown in China is also a concern, he said. Rosengren’s strongly dovish comments come as Fed policymakers prepare to meet in about two weeks to weigh a possible rate hike.

Reuters