25 June 2019

Fed Decision to Hold Steady Was a ‘Close Call’

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Federal Reserve officials who have spoken following last week’s high-profile policy meeting say a rate increase this year remains in the cards. In fact, central bankers say they weren’t far from taking that first step to start raising short-term interest rates. The decision not to raise rates was a “close call,” Federal Reserve Bank of Atlanta President Dennis Lockhart said Monday in Atlanta. Given all the tumult tied to China and other foreign economies and the resulting market churn, he said “I thought it prudent to wait” longer to raise rates.

Other Fed officials also indicated in recent days the decision was close. The camp advocating caution won over the Federal Open Market Committee, which voted 9-1 on Thursday to keep its benchmark rate near zero—where it has been since December 2008—to get a better read on how global economic turbulence and unsettled markets are affecting the outlook.

While officials agree rates should rise this year, comments since the meeting show a split on when exactly that should happen. Mr. Lockhart, who holds a voting role on the FOMC and often is looked to as a bellwether for the consensus view of policy makers, thinks the Fed will raise rates this year, citing an economy that is “performing solidly” amid good job gains. But he also said that while the Fed can act at any of its two remaining meetings this year, there is a tight window to gain the needed confidence to boost rates at the late October session.

Speaking in New York on Saturday, San Francisco Fed leader John Williams, another FOMC voter, agreed that a rate rise later this year remains “appropriate.” He said it was a good idea to hold off on boosting borrowing costs for a little while longer, but added the Fed shouldn’t wait indefinitely because that might force it to act more aggressively than he would like.

The decision not to act was countered by two other policy makers who believe the economy has improved enough for the central bank to begin moving toward a more historically normal policy stance now. Mr. Lacker said there would be no real cost with raising rates in this economy, and he dismissed fears that inflation is too low despite the fact the Fed has missed hitting its 2% target for three years and doesn’t expect to get there until 2018.

Speaking in Nashville on Saturday, St. Louis Fed leader James Bullard said that if he had a vote on the FOMC now, Mr. Lacker’s opposition would have been less lonely. “The case for policy normalization is quite strong” because the Fed has gotten what it set out to achieve with its hiring and inflation goals, he said. Mr. Bullard said the Fed meeting last week was “pressure packed.” He said those who don’t want to raise rates are failing to answer that question.

Click here to access the full article on The Wall Street Journal.

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