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Fed divisions exposed as Tarullo says he doesn't back 2015 hike

Wednesday, October 14, 2015 - 07:17
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Federal Reserve policy divisions were exposed Tuesday as Governor Daniel Tarullo argued interest rates should stay on hold while documents showed most regional Fed directors sought higher borrowing costs, challenging Chair Janet Yellen to maintain consensus.

[WASHINGTON] Federal Reserve policy divisions were exposed Tuesday as Governor Daniel Tarullo argued interest rates should stay on hold while documents showed most regional Fed directors sought higher borrowing costs, challenging Chair Janet Yellen to maintain consensus.

Mr Tarullo told CNBC that he doesn't currently favor raising interest rates in 2015. That lines him up with fellow Governor Lael Brainard, who made the case on Monday for patience, and diverges from the majority of Federal Open Market Committee members including Ms Yellen. She said on Sept 24 that she expected the first increase since 2006 to be warranted by year-end. Ms Yellen hasn't since spoken publicly on policy.

The dovish remarks from two of the five members of the Fed Board in Washington are an unusually sharp contradiction of the Fed's leadership and set the stage for a robust debate at the central bank's two remaining policy-setting meetings this year.

Vice Chair Stanley Fischer said on Sunday a move was still needed this year so long as the economy grows as expected, and New York Fed President William C Dudley has also placed himself in the 2015 liftoff camp. The Fed meets on Oct 27-28 and Dec 15-16.

Minutes from the central banks' discount-rate meetings released on Tuesday showed that eight of 12 regional Fed bank boards voted in September to raise the discount rate, or the rate charged to banks for direct loans from the Fed. The Board in Washington declined to implement their request.

The split - in which regional heads including St. Louis's James Bullard and Richmond's Jeffrey Lacker are pushing Ms Yellen to get going while board members including Ms Brainard and Mr Tarullo urge caution - hinges on how officials read the economy.  Some look toward falling unemployment and sustained consumer spending and see an outlook in which US growth closes in on the economy's longer-run potential. Others see still- subdued inflation and a lack of wage growth and argue that the risks to raising rates outweigh the benefits.

"Right now, my expectation is, given where I think the economy would go, I wouldn't expect it would be appropriate to raise rates," Mr Tarullo said in the CNBC interview. "I want to hasten to add that that is an outlook that changes based on developments in the economy." Chinese Uncertainty Fed officials last month opted to delay a rate rise to wait for more information about how slowing growth in China impacts the US outlook for inflation and growth. Economic projections prepared for the meeting show that 13 of 17 of the central bankers saw a rate rise as appropriate this year.

Mr Tarullo and Ms Brainard's comments suggested to economists they've joined Chicago Fed chief Charles Evans and Minneapolis's Narayana Kocherlakota in refraining from seeking a 2015 rate rise.

BLOOMBERG

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