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Low wages, high dollar test Fed's patience

How patient will Fed chair Janet Yellen be?

[WASHINGTON] How patient will Fed chair Janet Yellen be?

That's the question as the Federal Reserve heads into a policy meeting this week that could set the clock ticking for a midyear increase in interest rates.

After holding the benchmark federal funds rate at zero for more than six years of crisis and recovery, the Fed has stoked expectations of a hike for months.

But it has also stressed that it "can be patient" before taking the big step, leaving analysts and investors in debate, over just how fast or slow it could move.

Any decision has deep ramifications for markets. Expectations of a Fed rate increase, while central banks in Europe, China and Japan move in the opposite direction in monetary policy, have spurred a pullout of capital from developing economies and much greater volatility in capital markets.

They have also contributed to the dollar's 20 per cent rise against a basket of major currencies in the past year, cutting the competitiveness of US exports.

The Federal Open Market Committee (FOMC), the Fed's policy arm, meets on Tuesday and Wednesday amid broad signs that the US economy can handle a rate increase.

Proponents say that growth is strong enough and the unemployment rate at 5.5 per cent low enough. More importantly, they argue, not lifting the rate very soon risks dangerously stoking inflation down the road.


But some of Yellen's own markers for a hike remain distant.

Inflation right now is far below target, wage growth is flat, and part-time employment rates and long-term unemployment numbers remain high - all signs that feed doubts about the strength of the jobs market and the overall economy.

Hence the questions about how much patience Ms Yellen has, a year into her tenure at the head of the US central bank.

The FOMC only introduced the idea that it would stay "patient" in December, two months after it ended its quantitative easing (QE) stimulus program.

Ms Yellen at the time indicated the policymakers would signal they are a big step closer to an increase - possibly within two FOMC meetings - when they drop the word from their meeting statement.

However, analysts say the unanticipated strength of the dollar, up 7.5 per cent against a trade-weighted basket of currencies, and 15 percent against the euro, since the beginning of the year, could combine with some very recent weak data to again give the policymakers pause.

Key metrics of inflation - the producer and consumer price indices - are both negative for the past 12 months.

Consumer sentiment has fallen, the housing sector is slower than expected, and poor retail sales in February suggest consumers are not yet comfortable to spend the gains from savings on cheaper gasoline.

"Sales have now fallen in each of the past three months, which rings alarm bells about the health of the US economy," said Chris Williamson of Markit.

"These worrying retail sales numbers, alongside weak inflation and wage growth trends, mean it's likely that the Fed will delay any tightening of policy until a clearer picture of the economy emerges later in the year." If they do drop "patient" from Wednesday's policy statement, counting two more meetings, that would open the door to the first rate increase in June.

Recent comments have shown some Fed officials clearly anxious to take the first step.

"I think that by mid-year it will be the time to have a serious discussion about starting to raise rates," said John Williams, president of the Fed's San Francisco branch, in early March.

"I see a safer course in a gradual increase, and that calls for starting a bit earlier." Nariman Behravesh, chief economist at IHS Global Insight, says all the signs have been for a rate hike at midyear.

"I don't think it's going to delay... It sure looks like they are going to hike rates in June. But as long as the dollar's strength continues, they've got this stiff headwind, you could see the Fed, after the first hike, proceed very slowly."