WASHINGTON — As markets jitter and stock prices fall, investors increasingly are betting that the Federal Reserve will not raise interest rates this year.þþTheir conclusion is a striking rejection of the Fed’s stated plans — and it appears premature.þþThe Fed watches financial markets closely, of course. Investors are losing money they might have spent, and falling prices can be an indicator of broader economic problems.þþBut the losses so far probably aren’t big enough to crimp growth, and officials have plenty of time to see what happens next. The Fed’s policy making committee still has meetings scheduled this year in September, October and December.þþ“I expect the normalization of monetary policy — that is, interest rates — to begin sometime this year,” Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in a calming speech on Monday that he delivered in Berkeley, Calif., as the closing bell rang in New York, ending another ride on the market roller coaster.þþThe volatility of financial markets over the last few days contrasts with the stability of domestic economic growth over the last several years. The Fed is focused on that broader picture, and while the pace of growth remains sluggish by past standards, central bank officials have suggested repeatedly that they regard it as good enough.þþMr. Lockhart noted some of the factors that are roiling markets, including the rise of the dollar, China’s currency devaluation and falling oil prices. But he said the Atlanta Fed expected the economy to continue its expansion, including job growth.þþ“The current bout of market turmoil, if it continues, might persuade the Fed to hold off on raising interest rates in September,” Paul Ashworth, chief North America economist at Capital Economics, wrote on Monday. “Since that volatility doesn’t reflect any genuine economic slump, however, we wouldn’t be surprised if it proved short-lived, leaving the way open for the Fed to begin raising rates at some point this year.”þþJanet L. Yellen, the Federal Reserve chairwoman, has said that the Fed wants to raise its benchmark rate slowly over the next several years, gradually reducing its long-running stimulus campaign to bring the economy back to good health. The Fed has held short-term rates near zero since December 2008.þþThe Fed has repeatedly delayed the beginning of that process, as economic growth has fallen short of its expectations. But as recently as June, most of the Fed’s leadership — 15 of the 17 senior officials — indicated they planned to start raising rates this year.þþThat plan faced considerable skepticism even before the recent market downturn. Inflation has remained persistently sluggish since the Great Recession, even as job growth has strengthened. Some Fed officials cautioned that the central bank has not done enough to raise inflation toward its targeted 2 percent annual pace.þþRecent events have heightened those misgivings. The decline of oil prices and China’s latest economic stimulus may further dampen inflation. The fall of stock prices also reflects concern among some investors about the health of the domestic economy. The share of Americans without jobs remains unusually high and wage growth remains weak, problems that a premature rate increase could exacerbate.þþ“A reasonable assessment of current conditions’’ suggests that a rate increase “in the near future would be a serious error that would threaten all three of the Fed’s major objectives — price stability, full employment and financial stability,” Lawrence H. Summers, a Harvard economist who served as President Obama’s chief economic adviser, wrote in an opinion piece in The Financial Times on Monday.þþIn addition, the International Monetary Fund has expressed concern that the Fed, by raising rates, could increase pressure on developing economies.þþAnd the market’s decline helps mitigate worries that low interest rates encourage excessive speculation.þþAgainst that backdrop, more investors are now concluding that the Fed will decide to wait a little longer before raising rates.þþMeasures of expectations derived from asset prices have shifted sharply in recent days. The odds of a September rate increase, by one measure, fell by half, from about 48 percent last week to just 22 percent, on Monday. Even more striking, the odds of a rate increase this year fell below 50 percent for the first time.þþMichael Gapen, chief United States economist at Barclays, who had predicted a September lift until the recent stock market sell-off, said he now expected the Fed to wait until March.þþ“Although we continue to see economic activity in the U.S. as solid and justifying modest rate hikes, we believe the Federal Reserve is unlikely to begin a hiking cycle in this environment for fear that such a move may further destabilize markets,” Mr. Gapen wrote in a note to clients on Monday.þþFed officials may reach a different conclusion, but the shift in expectations still poses a challenge because officials have said they want markets to be ready for an increase. By minimizing the element of surprise, they hope to minimize volatility.þþIf the Fed wants to convince investors that September is still on the table, time is running short. The most obvious opportunity comes this weekend, when central bankers will gather in Grand Teton National Park in Wyoming for an annual policy conference. The Fed’s vice chairman, Stanley Fischer, is scheduled to speak.þ
Source: NY Times
