Fed’s Guv urges caution amid mixed data, global risks

Bloomberg

Federal Reserve Governor Lael Brainard said a ‘sobering’ US employment report suggested the labour market has slowed, as she continued to warn against moving too quickly to raise interest rates.
“In this environment, prudent risk management implies there is a benefit to waiting for additional data to provide confidence that domestic activity has rebounded strongly and reassurance that near-term international events will not derail progress toward our goals,” Brainard said in Washington.
“Several factors suggest that the appropriate path to return monetary policy to a neutral stance could turn out to be quite shallow and gradual in the medium term,” she told an audience at the Council on Foreign
Relations.
Brainard’s remarks come before the June 14-15 Federal Open Market Committee meeting in Washington, where officials will contemplate raising interest rates for the first time since December. The former Treasury Department official has emerged in the last year as one of the Fed’s most cautious officials when it comes to tightening monetary policy.

Hike Odds
The probability of a June hike diminished significantly in the estimation of investors and economists after the Labour Department reported employers added just 38,000 jobs in May, marking the weakest jobs report since 2010.
The odds of a hike at this month’s FOMC meeting, implied by futures trading, tumbled to 4 percent following the employment report compared with 22 percent, and in July to about 31 percent from 55 percent.
Brainard said Friday’s job numbers “suggest that the labor market has slowed” even as she argued that slack remains in the labor force and wages remain low.
She pointed to the historically low level of employment-to-population in the US as a possible explanation.
She also cautioned that international risks remained despite the calm in markets since a January-February period of volatility.
Market Turmoil
“While the easing in financial conditions since mid-February is very welcome, it is important to recognise that some of the conditions underlying recent bouts of turmoil largely remain in place, and an important reason for the fading of this turbulence was the expectation of more gradual US monetary policy
tightening,” she said.
Global markets remain fragile, she said, with sensitivity to exchange-rate movements remaining elevated. That is consistent with research suggesting “cross border financial transmission is likely to be amplified” as long as interest rates set by major central banks remain near zero, she said.
“The fragility of the global economic environment is unlikely to resolve any time soon,” she said.
Brainard said China and other emerging markets remain a source of risks, along with the possibility that UK voters may decide in a June 23
referendum to leave the European Union.
“We cannot rule out a significant adverse reaction to such an outcome in the near term, such as a substantial jump in financial risk premiums,” she said.
“Because international financial markets are tightly linked, an adverse reaction in European financial markets could affect US financial markets, and, through them, real activity in the United States.”

Sharp Reaction
Brainard, 54, has argued since late last year that the US is likely to be held back by sluggish growth abroad, combined with increasingly significant economic and financial linkages that bind the world’s major economies. Moving too quickly with rate increases, she has said, would risk provoking a sharp reaction from financial markets.
That scenario appeared to play out earlier this year after the Fed raised rates in December and published projections calling for an additional four increases in 2016. New worries over a slowdown in China pushed global financial markets into a tailspin in
January.
The Fed helped settle markets in March by halving its outlook for 2016 rate hikes to two.