Two influential Federal Reserve policymakers on Friday reinforced the message that an interest rate hike is coming before year end, saying that while they expect to move, things could change that force the U.S. central bank to delay again.
New York Fed President William Dudley and Dennis Lockhart of the Atlanta Fed each said they expected a policy tightening in 2015 despite some recent red flags. But they clearly left the door open to waiting until 2016 if it looks like the U.S. economy is threatened by a global slowdown.
The pair, speaking separately in New York, raised questions over the likelihood they would be have enough information in hand to lift rates by an Oct. 27-28 policy meeting, suggesting that a meeting set for Dec. 15-16 may be earmarked for action.
"Based on my forecast, yes I am" expecting to raise rates this year, said Dudley, a close ally of Fed Chair Janet Yellen who has a permanent vote on policy.
"But it's a forecast, and we're going to get a lot of data between now and December. So it's not a commitment," he said on CNBC TV. "There certainly is a risk that the economy evolves in a very different way than I expect, and obviously it would be totally inappropriate for me to not take that into consideration."
In a relatively close call, the central bank held off on a rate hike last month in the face of a slowdown in China and elsewhere, financial market turbulence and falling commodity prices. All of those could keep U.S. inflation, now at 1.3%, below the Fed's 2% target.
Since then, disappointing September jobs growth has caused investors to sharply discount an October rate hike, and to give a December move about a 40% probability, based on futures markets.
Lockhart, a well-respected centrist and a voter on the Fed's monetary policy committee this year, said the international slowdown and last month's weak U.S. jobs report show there is "a touch more downside risk" to the U.S. economy.
Therefore, he said, the Fed will need to monitor the strength of the consumer in coming weeks and months to decide whether to go ahead with the first rate hike in nearly a decade.
"The economy remains on a satisfactory track and ... I see a (rate) liftoff decision later this year at the October or December FOMC meetings as likely appropriate," Lockhart said of the policy-making Federal Open Market Committee.
"However the data are giving off varied signals, and there is more ambiguity in the current moment than a few weeks ago," he added at a Society of American Business Editors and Writers conference. This "calls for especially diligent monitoring of incoming data with particular attention to consumer activity."
The latest reading on the world's largest economy, a slight drop in U.S. import prices last month, suggested on Friday that the rate of imported deflation is slowing.
A Fed rate hike would reverberate through financial markets globally, depressing foreign currencies and possibly sucking more capital out of emerging markets in particular.
Focus on December
Dudley said "it's possible" that the Fed could begin hiking later this month, though he questioned whether data between now and then would give it confidence.
Lockhart, who like Dudley and most other Fed officials once expected a rate hike around mid-2015, noted that the Fed would have more information on inflation, the labor market and consumer activity by December. But he too kept a move in October on the table.
"I hope to avoid the trap of letting one or two months' specific data overly influence my outlook for the economy overall," he said. "The ambiguity of the moment reinforces the need to closely watch the vital signs of the economy over the coming weeks to determine if the outlook has changed."
Both stressed that the Fed would not overreact to financial market moves in deciding monetary policy, unless they directly signal threats to the economy.
Dudley said volatility is to be expected.
"Now as we get closer to that liftoff point, and now that we're at a 5.1% unemployment rate, the data really does matter in terms of how it affects the (economic) outlook so of course markets are going to react to that data much more now than it would a few years ago," he said.