Tags: federal reserve | rates | economy | patience

Fed in No Rush to Hike Rates Amid Economic Uncertainty

By    |   Wednesday, 28 January 2015 07:23 AM

As the Federal Open Market Committee concludes its first two-day policy meeting of 2015, Federal Reserve officials have been weighing a complicated tug of war between domestic and international economic considerations.

They are also aware of the uncertainties associated with Europe’s increasingly fluid political and geopolitical situation.

As such, look for them to stand pat, pushing any major policy signaling to their next meeting, in mid-March.

The U.S. economy has continued to heal since the FOMC met last, in December. Although this isn't the case across the board, the data have been generally favorable, particularly when it comes to robust job growth and lower unemployment.

One notable trouble spot has been disappointing wage growth, but there are good reasons to postulate that the weakness will be reversed in the months ahead.

Europe's QE Quandary

The international context has proved a lot less encouraging. Economic growth in both the eurozone and Japan has continued to struggle, aggravated by the threat of damaging deflation. And China’s gross domestic product increase of 7.4 percent in 2014, the slowest full-year pace in 24 years, highlighted the slowing in the emerging world. Even the U.K., which has been a relative bright spot, disappointed with its GDP numbers this week showing the economy had expanded by just 0.5 percent in the last quarter.

Political and geopolitical factors accentuate the notable divergence in economic performance between the U.S. and the rest of the world, fueling greater foreign exchange volatility that some central banks and multinational companies struggle with.

In response to the worsening violence in eastern Ukraine, the European Union is considering additional sanctions on Russia.  If the move is significant, it would probably trigger countersanctions by Russia, potentially further undermining Europe’s prospects.

At the same time, Syriza’s impressive win in the Greek elections on Sunday highlights a broader European phenomenon of a growing number of citizens losing trust in the established political order and turning to nontraditional parties that haven't yet outlined comprehensive and coherent economic programs.

With such noneconomic considerations clouding the global picture, Fed officials are likely to play for time. Look for them to minimize changes to their economic assessment while maintaining the policy signaling as is for now.

That means they will maintain their “patient” approach to policy interest rates, confirming the consensus that rate increases, if they occur this year (which I think they will), wouldn't start before June at the very earliest.

And when they do begin, the pace will be extremely gradual:  The endpoint will be below the 4 percent historical average, and the path will be cushioned by reassuring forward policy guidance.

To contact the author on this story: Mohamed El-Erian at melerian@bloomberg.net

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Look for the Fed to maintain their “patient” approach to policy interest rates, confirming the consensus that rate increases, if they occur this year (which I think they will), wouldn't start before June at the very earliest.
federal reserve, rates, economy, patience
445
2015-23-28
Wednesday, 28 January 2015 07:23 AM
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