Fed to hold fire on interest rates as world economy slows, Latest Business News - The New Paper

Fed to hold fire on interest rates as world economy slows

This article is more than 12 months old

WASHINGTON There is virtually no chance the US Federal Reserve will raise interest rates this week, since policymakers have all but promised to hold their fire as the global economy slows.

With inflation still tame as US economic growth decelerates, economists also say Fed officials will lower the number of rate hikes they expect this year, from the two projected in December.

Fed Chairman Jerome Powell is due to announce the second policy decision of the year on Wednesday by the rate-setting Federal Open Market Committee (FOMC).

The benchmark interest rate is now in a range of 2.25 to 2.5 percent and futures markets see no more rate hikes this year.

Investors now put the odds at one in three that the central bank will begin cutting rates in the next 10 months.

Some economists warn that is unlikely. With unemployment falling and eventually pushing wages higher, inflation might rear its head as soon as the summer, compelling the Fed to act.

But last month, Mr Powell said he anticipates low energy prices to drive inflation further below the Fed's two per cent target, at least for a "for a time".

Other influential players on the FOMC have called for caution. New York Fed President John Williams said this month he expects economic growth to slow "considerably" this year.

Fed Governor Lael Brainard said it was time for "a period of watchful waiting" on policy.

Six months earlier, Ms Brainard had suggested the Fed would continue raising rates through 2019, not pausing at "neutral," which neither stimulates nor slows the economy.

"It's a completely different world," said Ms Kathy Bostjancic, head of US macro investors services at Oxford Economics.

Wall Street's December rout, when the S&P 500 lost nearly 10 per cent of its value on fears the Fed would keep hiking, was a learning moment, she said.

"I think the markets spooked them a bit and I do think all of that together has led them to say let's pause for some time."

Ms Bostjancic's firm, like many, has cut its forecast to a single rate increase this year - down from two - and expects first-quarter economic growth to slow to 0.7 per cent, its slowest in more than three years.

Job growth ground to a halt in February but has maintained a good pace on average. In addition to that, the housing sector shows signs of recovery.

Meanwhile, manufacturing and consumer spending have fallen off sharply.

A major question mark remains the extent of the slowdowns in China and Europe.

But Mr Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, said US growth should be stronger in the rest of the year, meaning it is unlikely the Fed will cut its median forecast for rate hikes in 2019 to zero.

"If the economy keeps going at two per cent, that would still justify another rate hike at some point." - AFP