Fed’s historic rate hike slammed by markets, weak data
WASHINGTON: A lull in global market turmoil allowed the US Federal Reserve to raise interest rates with a clear conscience in December, but policymakers across the spectrum now acknowledge the economic landscape may have shifted beneath their feet since the move.
It is too early to declare the first rate hike in nearly a decade a mistake, they say, or to fear the US central bank will be forced, like the European Central Bank and others, to retreat before the current tightening cycle is complete.
But that process could take years, given the gradual pace of rate hikes the Fed has projected, and cracks may already be appearing.
Global stock markets continued their 2016 nosedive on Friday as investors braced for a third straight week of losses. Following sharp drops in Europe and Asia, major US stock indexes were down more than 3 percent in midday trading in New York.
While Fed policymakers do not put a lot of weight on equity market moves, they are concerned the loss of investment wealth, unless it proves temporary, could curb spending and confidence among US households and businesses. The Fed forecast that underpinned last month’s rate hike leans heavily on domestic consumption to keep the economy growing and offset what the central bank acknowledged is a risky global environment.
US data on Friday also showed a broad decline in retail sales, even after factoring out the downward pull of cheaper gas and prices of some other volatile goods.
A global equities selloff sparked by a sharp drop on China’s stock market caused the Fed to delay a widely expected rate hike at its September policy meeting, and officials once again are closely watching volatility on financial markets.
“It is a matter of how long it lasts,” Atlanta Federal Reserve Bank President Dennis Lockhart said this week. “I don’t want to put a specific number on it, but a matter of several weeks can begin to have an influence on the real economy.”
Low oil prices – they tumbled on Friday below the psychologically important $30 a barrel level- are keeping a lid on consumer prices and raising concerns that inflation will remain stalled below the Fed’s 2 percent target.
Central bank data on Friday also painted a gloomy picture of the manufacturing sector, which has been hard hit by the impact of a strong US dollar and deep spending cuts by oil and gas companies.