For the second time this year, Federal Reserve o
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Posted On: 09/25/2016 11:13:22 AM
For the second time this year, Federal Reserve officials pointed to a looming rate hike and then pulled back, actions which have left the central bank “perilously close” to losing its credibility with the markets.
Published: Sept 23, 2016 12:51 p.m. ET
How often can Fed lay out case for rate hike and then not follow through, asks observer
“There are only so many times you can lay out the case to act and then do nothing and still expect to maintain your credibility,” said Richard Moody, chief economist at Regions Financial Corp. in Birmingham, Alabama.
“If not there yet, the Fed is perilously close to being there,” he added.
The Fed on Wednesday kept interest rates unchanged but Chairwoman Janet Yellen said one increase is “appropriate” this year barring any major new risks to the economy.
Read: Fed stands pat on interest rates ‘for time being’
While many analysts argue Yellen’s statement lays the groundwork for a rate hike in December, doubts remain. Minutes of the Fed’s April meeting pointed to a rate hike in June but the central bank pulled back after a weak May job report.
While Yellen’s statement may be the intended to point to a move by the end of the year, “we can’t help but think leaving a three-month window simply leaves three months for something to go wrong and preclude a December rate hike,” Moody said.
Economists at Goldman Sachs agreed that a December rate hike was not a done deal.
“As [Wednesday’s] decision showed, when faced with conflicting signals, a committee focused on risk management will be inclined to hold fire,” said Zach Pandl, a senior economist for Goldman Sachs.
Tom Porcelli, chief U.S. economist at RBC Capital Markets, said, in order to hike in December, the Fed will have to be able to say, as it did in its statement Wednesday, that the labor market “has continued to strengthen” and the consumer has been “growing strongly.”
“If that materializes you theoretically get a hike - unless, of course, something pops up that derails them.”
“For those with short memories, please keep in mind this Fed is easily derailed.”
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