WASHINGTON — Federal Reserve
officials will gather in Washington on Tuesday and Wednesday to debate
whether a bumpy start to the year is now in the rearview mirror,
clearing the way for higher interest rates.
Fed is not likely to raise rates this week, but the steady growth of
the domestic economy — despite the wobbles of financial markets and the
weakness of other developed nations — is strengthening the hand of
officials who say that higher rates are necessary to maintain control of
challenge now confronting Janet L. Yellen, the Fed’s chairwoman, is
forging a consensus among Fed officials about how soon to resume the
march begun in December, when the Fed raised rates, by 0.25 percent, for
the first time since the financial crisis.
Fed officials still emphasize caution, arguing there is little risk in
moving slowly. Lael Brainard, a Fed governor, has been particularly
vocal in warning that the weakness of the global economy could weigh on
“We should not take the strength in the U.S. labor market and consumption for granted,” Ms. Brainard said in a speech
last week. “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.”
other officials are antsy about inflation. Prices rose 1.7 percent in
the 12 months through the end of January, according to
the latest reading
from the Fed’s preferred gauge. The modest uptick brings the Fed closer
to its goal of 2 percent annual inflation for the first time in years.
may well at present be seeing the first stirrings of an increase in the
inflation rate,” Stanley Fischer, the Fed’s vice chairman, said
in a speech last week.
officials predicted in December that they would raise the benchmark
rate by about one percentage point over the course of 2016, most likely
in four quarter-point increments. The Fed was widely expected to make
the first of those increases this week. But when markets started
gyrating, Fed officials
hit the brakes, offering reassurances that they would not make any big decisions until things calmed down.
conditions tightened early in the year as investors pulled back from
riskier loans and demanded higher interest rates. The effect by the end
of January was the equivalent of the Fed raising rates by one percentage
point, according to economists at Goldman Sachs.
the tightening has almost completely reversed. The Dow Jones industrial
average, which lost 10 percent of its value during the first six weeks
of the year, has rebounded and is now down just 1 percent this year.
Indeed, some analysts say the Fed overreacted and should have preserved
the option of a rate increase in March.
get that when it comes to monetary policy, concerns about market
stability and global headwinds have trumped the resilience in the U.S.
economy,” said Tom Porcelli, chief United States economist at RBC
Capital Markets. “But even here, there has been considerable
analysts do not expect the Fed to surprise investors, who have written
off the chances of a policy change this week. Instead, most are looking
for the Fed to signal that rate increases will resume in the coming
The Fed’s next scheduled meetings are in April and June.
growth remains slow, which some Fed officials see as evidence that
employers are still finding an abundance of candidates for available
jobs. Such slack in the labor market might suggest the Fed should
persist in its stimulus campaign.
a recent analysis, however, researchers at the Federal Reserve Bank of
San Francisco argued that the weakness of wage growth reflected a shift
in the composition of the work force as relatively high-paid baby
boomers retire and companies hire younger, cheaper workers.
“Sluggish wage growth may be a poor indicator of labor market slack,” the analysis concluded.
“In fact, correcting for worker composition changes, wages are
consistent with a strong labor market that is drawing low-wage workers
into full-time employment.”
growth has outpaced economic growth, which remains relatively weak. But
that, too, has waned in the minds of Fed officials as a reason to
extend the central bank’s stimulus campaign. There is a growing
consensus that job growth is relatively fast
because productivity growth is relatively slow.
The output of each worker, in other words, is rising more slowly, so
employers need more workers at any given level of economic growth.
Brainard suggested last month that the Fed might be limited in its
ability to raise rates at a time when other major central banks are
pressing ahead with stimulus campaigns. The divergence tends to amplify
the impact of rate increases, for example by increasing the value of the
dollar and restraining exports.
that U.S. monetary policy would chart a notably divergent path have
been tempered by powerful crosscurrents from abroad,” Ms. Brainard said
at a conference in New York.
The European Central Bank cut its benchmark interest rate
last week to zero from 0.05 percent, a largely symbolic move, and
announced that it would increase its purchases of government bonds and
begin to buy corporate bonds. It also announced a pair of measures to
encourage bank lending: increasing the penalties on money that banks
keep on deposit with the E.C.B. and, for the first time, paying banks
what amounts to a small fee to make loans.
The central banks of Japan and China are also continuing to pump money.
at Goldman Sachs, however, concluded in a recent analysis that the
current differences among the major central banks were not “unusual or
implausible” by the standards of recent decades.
the economic fortunes of the United States continue to diverge from
those of other developed nations, it is likely that the Fed’s path will