The U.S. Federal Reserve are still divided on whether or not to increase interest rates, as some permanent members who are voting continue to be wary against supporting an immediate hike in the run-up to their policy meeting later this month.
Based on a series of hawkish speeches from the fed, financial markets are already pricing towards a more likely scenario of a rate hike on September 21. The speech of Boston Federal Reserve President Eric Rosengren increased the odds of an increased rate to 30 percent in September up from 24 percent before he spoke on the matter.
Before that, remarks from Federal Reserve Governor Daniel Tarullo had the probability down to 20 percent.
According to Tarullo, he would want to see more evidence of sustainable improvements to help the Fed reach its 2 percent inflation target before he could recommend to raise rates. His rhetoric put a damper on investor expectations for the Central Bank to increase rates in the upcoming meeting on September 20-21.
“As inflation in my view shows that it’s picking up in a sustainable way… then we’d raise rates,” Tarullo said, emphasizing that there had been “so many false up and downs in the past.”
The board of governors in Washington consists of five members that include Tarullo, having a permanent vote on the monetary policy along with five other voting members, bringing the number to ten.
Fed Governor Lael Brainard has also been lobbying to stall the increase in rates until the issue of sluggish inflation and economic growth in the U.S. and in the world has been resolved. On Monday, she will be speaking before the communications blackout of the central bank takes effect.
Included in the ten voters are heads of regional Fed banks, including Esther George, who is a staunch supporter of a rate increase and has been at the forefront of the dissention in three of the four latest policy meetings that left rates unchanged.
The comments of Tarullo are in stark contrast with Rosengren who claims that the risks to the U.S. economy piles ever higher the longer the central bank waits to increase its rates.
Risks to the forecast are becoming increasingly two-sided,” Rosengren said. He also added that the U.S. economy remains strong even in the face of an economic slowdown outside the country, and that the U.S. economy could “overheat” if the Fed policy remains the same.
Even as Rosengen gave his statement, he gave no indication on whether or not he will back a rate hike this year.
The financial markets are preparing their pricing for a rate hike in December. Fed Chair Janet Yellen said that the case for an increase in the federal funds rate has strengthened in recent months.”
Another Fed official, Dallas Fed President Robert Kaplan, backed Yellen’s statement on Friday and added that “long-term headwinds to economic growth mean the central bank can afford to raise rates very slowly.”
“The Fed can afford to be patient and deliberate in its actions,” Kaplan told reporters.