Fed acknowledges concerns but still sees US rate hikes

San Francisco

FEDERAL Reserve policymakers on Friday signalled further interest rate increases ahead, even as they raised relatively muted concerns over a potential global slowdown that has markets betting heavily that the rate-hike cycle will soon peter out.

The widening chasm between market expectations and the interest-rate path the Fed laid out just two months ago underscores the biggest question facing US central bankers: How much weight to give a growing number of potential red flags, even as robust US economic growth continues to push down unemployment and create jobs? "We are at a point now where we really need to be especially data dependent," Richard Clarida, the Fed's newly appointed vice chair, said in a CNBC interview.

"I think certainly where the economy is today, and the Fed's projection of where it's going, that being at neutral would make sense," he added, defining "neutral" as the policy rate somewhere between 2.5 per cent and 3.5 per cent.

Such a range implies anywhere from two to six more rate hikes, and Mr Clarida declined to say how many he would prefer. He did say he is optimistic that US productivity is rising, a view that suggests he would not see faster economic or wage growth as necessarily feeding into higher inflation or, necessarily, requiring tighter policy. But he also sounded a mild warning.

"There is some evidence of global slowing," Mr Clarida said.

"That's something that is going to be relevant as I think about the outlook for the US economy, because it impacts big parts of the economy through trade and through capital markets and the like."

Federal Reserve Bank of Dallas President Robert Kaplan, in a separate interview with Fox Business, also said he is seeing a growth slowdown in Europe and China.

"It's my own judgement that global growth is going to be a little bit of a headwind, and it may spill over to the United States," Mr Kaplan said.

The Fed raised interest rates three times this year and is expected to raise its target again next month, to a range of 2.25 per cent to 2.5 per cent. As of September, Fed policymakers expected to need to increase rates three more times next year, a view they will update next month.

Over the last week, betting in contracts tied to the Fed's policy suggests that even two rate hikes might be a stretch. REUTERS