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Fed may hike just once in 2015 as Yellen strikes less certain tone

[SAN FRANCISCO] The question of how quickly the Federal Reserve should raise rates is dividing normally like-minded policymakers at the US central bank, pitting those who favour two hikes this year against a growing number of those who want to stop at just one.

That shift, and the very real possibility that Fed Chair Janet Yellen may be one of the five who now prefer a single rate hike in 2015 rather than among an equal number who prefer two, is bolstering the view that the Fed may not deliver until late in the year.

The Fed has kept interest rates near zero since December 2008, and on Wednesday unanimously voted to keep them there. Behind that unanimity rages a debate over how long that state of affairs should last.

"While we cannot be certain, our best guess is that Fed Chair Yellen now anticipates only one increase this year - an important shift in the committee's centre of gravity," Goldman Sachs economists Jan Hatzius and Zach Pandl wrote in a note advising clients they now expect the Fed to wait until December to raise rates, from September previously.

"If Yellen is in the one-hike camp, she is the decider, and the other governors will likely vote in deference to the chair," said Kevin Logan, chief US economist at HSBC Securities, which also expects the Fed to hike rates only once this year, in December.

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New forecasts from the Fed's 17 policymakers released after the central bank's policy-setting meeting this week suggest four officials who in March recommended two rate hikes this year now want only one.

Although the Fed does not identify whose forecast is whose, an examination of recent comments by Fed officials strongly suggests at least two of those who prefer two rate hikes are on the Fed's powerful five-member Board, while at least two shifted to a one-rate-hike view.

That's notable because the Fed governors typically vote as a block, standing with the chair.

An unexpectedly weak first quarter may have caused a few officials to blink, putting data in coming months, particularly on job creation and inflation, newly front and centre.

Those eyeing a hike this year will be looking for a continuation of blowout data that saw the US economy create 280,000 jobs in May..

Mr Logan and other economists said that dovish speeches earlier this month by governors Lael Brainard and Daniel Tarullo suggest one or both made the move to supporting just one rate hike in 2015. The influential head of the New York Fed, William Dudley, also sounded cautious tones in a speech this month, so he could have jumped ship too.

Some economists believe the fourth official to newly join the one-hike camp was Atlanta Fed President Dennis Lockhart, who has said he would like to see more evidence of economic momentum before supporting a rate hike.

But to other economists, the argument that it is Yellen is more compelling. In a news conference following the Fed's meeting, Ms Yellen described a labour market that in her view is still cyclically weak, and said that while "we could certainly see data that would justify" a rate increase this year, there are no guarantees.

Contrast that with her comment in May that "if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy."

The forecasts released on Wednesday showed a third set of five policymakers preferring three rate hikes this year, but these are likely all presidents of regional Fed banks who are not typically part of the decision-making core at the central bank, economists parsing the so-called dot chart say. Two other policymakers, both Fed bank presidents, prefer no rate hikes this year.

The forecasts continue to suggest that the centre of the committee is still pulling for two hikes this year. But"uncertainty is very high," said Diane Swonk, chief economist at Mesirow Financial, in Chicago. "The threshold on liftoff is low, but the decision to raise rates a second time is very high."


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