Fed split makes its task tougher

The two clashing readings on the US economy and the appropriate monetary policy are quite interesting. Two of the central bank’s most influential policymakers differ over the best options to stimulate the growth of US economy.
Fed Governor Lael Brainard, who has emerged as a leader of the Fed’s dovish faction, argued for “patience” in raising interest rates. “Given weak and decelerating foreign demand, it is critical to carefully protect and preserve the progress we have made here at home through prudent adjustments to the policy path,” she told a group of bankers. She also pointed out that the US central bank should put a “high premium on clear evidence that inflation is moving higher”, before proceeding to tighten monetary policy.
This proposal is opposed by Fed Vice Chair Stanley Fischer, who has consistently sounded more hawkish than many of his colleagues. He warned that inflation is showing signs of accelerating, words that policymakers often use when signalling a preference for raising interest rates.
“We may well at present be seeing the first stirrings of an increase in the inflation rate,” Fischer said, adding that an increase from too-low levels is “something that we would like to happen”.
Such opposing views depict challenges that Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, will face when policymakers come together to decide how best to foster economic recovery.
The doves who opposed the interest rate hike at least now, focus on the drag from weakness abroad and the downside risks to the US economy; while Fischer and the Fed’s more hawkish wing have highlighted the strength of the domestic US economy.
Yellen, who has managed the Fed for two years, is now at a fix as differences grow. It is unclear which side will win the day. The Fed in December raised interest rates for the first time in nearly a decade. At the time, it signalled it would likely raise rates four more times this year, reflecting a stronger US labour market and the view that inflation will begin to rise back towards the Fed’s 2 percent goal.
But an oil price slump, a global economic slowdown and volatile financial markets since the beginning of this year have convinced investors that the Fed’s optimism may be misplaced.
While Wall Street economists now expect just two rates hikes this year, traders of interest-rate futures are betting there will be just one.
The Federal Reserve uses tight monetary policies to manage overall economic growth in the United States. Policymakers did not raise rates at its January meeting, and officials are expected to leave rates unchanged when they meet again on March 15-16. Many analysts don’t expect another rate hike until June at the earliest.
Indeed, many US economists have been worried about the Federal Reserve’s tightening policy, saying it is dampening economic growth, a key survey showed on Monday.
The National Association for Business Economics said its semiannual survey of members found a large majority of business economists expect the Fed to continue raising the benchmark federal funds rate in 2016, following December’s hike from near zero.
Inflation by the Fed’s preferred measure has been running below target for more than four years. It had risen just 0.7 percent over the 12 months ending in December. In January, however, this measure of inflation jumped, rising 1.3 percent over the past 12 months. Core inflation, which excludes food and
energy, rose 1.7 percent.
The negative impact of the rising dollar on the level of GDP, relative to the baseline, is surprisingly large and persistent, with a cumulative impact of around 3 percentage points after three years. About half of this effect arrives in the first four quarters after the dollar rise, with the rest coming later. Based on these numbers, it is not hard to see why the US economy has started to show serious signs of weakness in recent quarters.
Despite differences among Fed officials, final say over whether to raise the interest rate or not, will be probably determined by figures and statistics.