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Fed splits raise doubts on 2015 rate rise

Sam Fleming in Washington

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Divisions have burst into the open at the top of the Federal Reserve over when to lift interest rates,
casting a fresh cloud of uncertainty over the US central bank’s strategy for withdrawing its monetary
stimulus.

In the past two days, two members of the US Federal Reserve board have signalled they are opposed
to a near-term increase in interest rates, questioning the approach adopted by chair Janet Yellen
amid divisions over the outlook for inflation.

Daniel Tarullo said in a CNBC interview on Tuesday that his current

expectation was that it was not appropriate to raise rates this year, joining fellow governor Lael
Brainard in favouring a wait-and-see approach.

The public disagreement at the level of the Fed’s board of governors is unusual. Both policymakers
appeared to raise doubts about an assumption undergirding Ms Yellen’s policymaking approach —
namely that as the US approaches full employment, inflation will start accelerating, according to the
so-called Phillips Curve.

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Mr Tarullo suggested the Fed should wait for “tangible evidence” of a pick-up in inflation before
moving amid a global disinflationary environment, whereas Ms Yellen has said she does not have to
see a significant acceleration in inflation before moving rates. Ms Brainard argued that “a variety of
econometric estimates would suggest that the classic Phillips curve influence of resource utilisation
on inflation is, at best, very weak at the moment”.

In her most recent speech, Ms Yellen said she was among those Fed policymakers who think an
increase in 2015 would be appropriate, as she argued factors such as falling commodity prices were
likely to be a temporary headwind to inflation. Over the weekend Stanley Fischer, vice-chair of the
Fed board, reinforced that message, telling a conference in Lima, Peru, that he also favoured a rise
in 2015.

Ángel Ubide, a senior fellow at the Peterson Institute for International Economics, said it would be
unprecedented in recent times if two Board governors went ahead and formally dissented against a
vote for an increase.

He added: “They [Brainard and Tarullo] are right that there is no need to raise rates soon if you look
at the outlook for inflation. The question is whether they are leading indicators, and whether Janet
Yellen is now also questioning whether it is wise to raise rates in 2015. That is something we simply
don’t know.”

The Fed held rates unchanged in its September meeting following weeks of speculation that an
increase was on the cards. Since then policymakers, including John Williams of the San Francisco
Fed, have suggested the decision was a close call, as they continue to hold open the prospect of a
move by the end of the year.

That impression was confirmed by minutes that revealed on Tuesday that eight of 12 regional
Federal Reserve banks had called for an increase in the interest rate on discount window loans at the
September meeting, in a possible hawkish signal.

Few market participants expect a move at this month’s meeting, but the The fact that [two]
position at the Fed’s December gathering is harder to predict. Mr Tarullo governors are publicly
and Ms Brainard argued that caution was currently the right approach doing this is highly
given the uncertainties surrounding the inflation outlook. unusual

Mr Tarullo, who is in charge of bank regulation at the Fed and comments - Michael Feroli at JPMorgan

infrequently on monetary policy, argued that, based on a “risk-

management approach” of being concerned that a premature rise might Tweet this quote

be harder to deal with than waiting a little bit longer, he “wouldn’t expect
it would be appropriate to raise rates” this year.

In a speech on Monday Ms Brainard laid out a detailed argument for caution, questioning the
wisdom of moving rates soon because of a risk the Fed would have to execute a costly U-turn. She
argued that the central bank should be “watching and waiting”, adding that financial market
movements have already delivered a tightening equivalent to two rate hikes.

The interventions further cloud muddy communications from the Fed about the policy outlook, at a
time when investors have been calling for a sense of where the Fed is heading. Given the divisions in
the central bank, however, there is a risk of further confusion in the weeks ahead.

RELATED TOPICS Federal Reserve USA, Central Banks, US Interest Rates, Central bank intervention

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