US Federal Reserve chair Jerome Powell. Picture: REUTERS/CARLOS BARRIA
US Federal Reserve chair Jerome Powell. Picture: REUTERS/CARLOS BARRIA

Washington — US central bankers could place interest rates on hold until end-March or longer as they wait for clarity on risks to global growth that could affect the US economy.

That’s the signal from recent comments by US Federal Reserve officials, reinforced by minutes of their December 18-19 meeting on Wednesday that showed many policy makers felt the central bank “could afford to be patient about further policy-firming”.  Investors will get another update when chair Jerome Powell speaks in Washington at 12pm local time.

“The message I am getting from Fed speakers is, ‘Our outlook is strong but in the near term we are going to wait for greater clarity and make sure the economy is on a sound footing before moving’,’’ said Laura Rosner, senior economist at MacroPolicy Perspectives. “They have been consistent and clear about the pause.’’

Central bankers raised the benchmark lending rate last month and said some “some further gradual increases’’ would be consistent with continued growth. Investors initially viewed the statement as hawkish, deepening stock-market losses. Bloomberg News reported two days later that US President Donald Trump had discussed firing Powell and the month became the worst December for stocks since the Great Depression.

However, the record of their discussion during the meeting revealed that policy makers preferred a more cautious approach — one that dovetails with their subsequent comments.

New York Fed president John Williams, in an interview with CNBC on December 21, described the Fed’s statement as “not a commitment or a promise”. Powell, speaking on January 4, said he’s “listening sensitively to the message that markets are sending” about downside risks.

Missing caution

“They kind of regrouped and Powell, last Friday, was very considerate” of downside risks, said Robert Martin, executive director at UBS Securities in New York. “Powell suggested if we see risks manifest, we are going to pause. That was missing from the press conference and the statement.”

Charles Evans, president of the Chicago Fed and a Federal open market committee voter in 2019, said on Wednesday that he foresees possibly three more hikes before the current rate cycle peaks. But because inflation looks stable around the Fed’s 2% target, “I feel we have good capacity to wait and carefully take stock of the incoming data and other developments,’’ he said.

Another 2019 voting member, Boston Fed chief Eric Rosengren, said later on Wednesday that the committee “can wait for greater clarity before adjusting policy’.’

The minutes highlighted the range of downside risks policy makers are facing, such as the possibility of a steeper downturn in global growth, an escalation of the trade war, or a larger-than-expected impact from their current tightening so far.

Robust jobs

US central bankers projected above-trend economic growth for this year in their December forecasts, and they expect the unemployment rate to fall further. Those forecasts appear supported by a robust December labour-market report. The economy added 312,000 non-farm jobs, the most in 10 months.

However, factory gauges from regional Fed banks indicate weakening activity, as does a service-industry index tracked by the US Institute for Supply Management. There are also signs that higher borrowing costs are affecting interest rate-sensitive sectors of the economy, such as home sales. The Fed has raised rates nine times since late 2015.

“Uncertainty is higher,’’ said Michael Gapen, chief US economist at Barclays Capital. “Their message is, ‘We are seeing some softening in these sectors and that tells us growth will be ebbing in the next couple of years. Why not be patient for a while and see how it plays out?’’’

With Christopher Condon and Matthew Boesler