Canadian Manufacturing

Global turmoil causing uncertainty for policy makers at the U.S. Federal Reserve

A memo from Fed officials expressed confidence in the strengthening labour market but was less bullish on other parts of the economy, such as manufacturing



WASHINGTON—Federal Reserve policy makers expressed growing concerns at their meeting last month about potential threats to the U.S. economy, including turbulence in financial markets, plunging oil prices and slowing growth in China and other emerging markets.

Minutes of their discussions released Feb. 17 showed Fed officials acknowledging that the developments made it difficult to forecast growth and inflation.

The officials said their outlook had grown more uncertain, and they stressed that the pace of any interest-rate increases would hinge on the latest economic data. The Fed raised rates from record lows in December, the first hike in nearly a decade.

While Fed officials continued to express confidence in the strengthening labour market, they were less bullish on other parts of the economy such as manufacturing.

“Most participants indicated that it was difficult to judge at this point whether the outlook for inflation and economic growth had changed materially, but they thought that uncertainty surrounding the outlook had increased as a result of recent financial and economic developments,” the minutes said.

Its brief policy statement removed language it had been using that officials judged the risks facing the economy as “balanced.” Most Fed officials felt there was not yet enough evidence to say the balance of risks had “changed materially,” though some officials did believe the downside risks had increased, according to the minutes.

Among the threats to U.S. growth, the minutes cited the slowdown in China and falling commodity prices that could hurt growth prospects in emerging market nations that produce those commodities. The Fed officials also discussed the steep declines in stock prices that had occurred since the beginning of the year.

Since the Fed’s January meeting, some economic indicators have flashed more encouraging signals. The economy created 151,000 jobs in January, pushing the unemployment rate down to an eight-year low of 4.9 per cent. The Fed reported Wednesday that industrial production rose 0.5 per cent in January, the best showing since July, though retail sales last month remained modest.

In December, the Fed had lifted its target for overnight bank lending from a record low to a new range of 0.25 per cent to 0.5 per cent _ the first hike after seven years of near-zero rates. It also released projections that indicated four additional quarter-point moves in 2016.

But since the start of this year, global financial markets have been rocked by disclosures that China, the world’s second largest economy, may be slowing more than previously believed. Oil prices have tumbled, while the U.S. dollar has strengthened. Both of those developments could make it harder for the Fed to achieve its inflation target.

Many private economists have cut their forecasts for Fed rate hikes this year from four down to two or fewer.

“The minutes of the January meeting provide the clearest hints yet that policy makers have likely stepped back from earlier plans to raise interest rates several times this year,” said Sal Guatieri, senior economist at BMO Capital Markets. “Until the Fed has more clarity on the impact of worsening financial conditions on the economy and inflation … it will be highly reluctant to pull the rate trigger a second time.”

Guatieri said he expected two rate hikes this year coming in June and July, assuming that financial markets continue to stabilize.

Fed Chair Janet Yellen acknowledged the darker economic landscape in Congressional testimony last week. But she said it was too soon to know whether the new risks would be severe enough to alter interest rate policies.

Yellen said the Fed was not on a “pre-set” course for rate hikes and would assess at its next meeting on March 15-16 whether recent developments have slowed the U.S. economy or threatened to derail the Fed’s goal of pushing inflation back toward 2 per cent.

Recent comments from other Fed officials also have sounded a note of caution.

In a Feb 16 speech, Eric Rosengren, president of the Fed’s Boston regional bank and a voter this year on interest rate policies, said that the global weakness may push back the Fed’s timetable on inflation.

“In my own view, if inflation is slower to return to its target, monetary policy normalization should be unhurried,” Rosengren said. “A more gradual approach is an appropriate response to headwinds from abroad that slow exports and financial volatility that raises the cost of funds to many firms.”

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