Federal Reserve may slow hikes

An influential Federal Reserve official yesterday said he sees downside risks to his US economic outlook, an assessment that could flag a longer pause before the Fed’s next interest rate hike than he and his colleagues had earlier signalled.

“At this moment, I judge that the balance of risks to my growth and inflation outlooks may be starting to tilt slightly to the downside,” New York Federal Reserve president William Dudley said in remarks at a conference in Hangzhou, China.

Although he said he still expects the US economy to grow about 2% this year, enough to push unemployment down and begin to pull inflation up to the Fed’s 2% target, he added, “on balance, I am somewhat less confident than I was before.”

The Fed raised interest rates in December for the first time in a decade, and signalled that it would probably raise rates four more times this year, a gradual pace by historical standards.

The Fed, in December, raised its target range for its benchmark policy rate by one quarter of a percentage point, and currently aims to keep the rate between 0.25% and 0.5%.

Mr Dudley, a close ally of Fed Chair Janet Yellen and a permanent voter on US monetary policy, suggested that the sharp global economic slowdown, stock-market sell-off and oil price slide since the beginning of the year may force the Fed to tighten monetary policy even more slowly.

The Fed put markets on notice for just such a possibility in January, saying it needed more time to assess global developments and their effect on the US economy before offering an assessment of the balance of risks to the outlook.

For Mr Dudley, the jury now appears to be in.

With turbulence in global financial markets reflecting mixed economic signals, the risks appear to have increased, and though so far he has left his outlook largely unchanged, continued tightening in financial markets “could potentially lead to a more significant downgrade to my outlook.”

Of particular concern, he said, were falling inflation expectations, as tracked both by market pricing and more importantly in his view, by surveys of households.

While so far the declines were not dangerously large, if they fell further they could make it more difficult for the Fed to bring inflation back up to its goal.

The Fed next meets in mid-March to consider monetary policy, and is widely expected to leave rates unchanged.