Boston Fed still expects Fed to hike rate this year

Weaker than expected non-farm payroll report signals US economy might stall, leading US Federal Reserve to delay its potential rate hike to 2016, President of Boston Fed, Eric Rosengren still awaits rate hike this year

Photo by: AP
Photo by: AP

President of the Federal Reserve Bank of Boston Eric Rosengren speaks with staff during a visit in Chelsea, October 16, 2014

Eric Rosengren still expects the Federal Reserve to raise interest rates this year despite what the head of the Boston Fed called a "weak" September jobs report, which could signal a more significant economic slowdown that delays the policy tightening.

In a Reuters interview, Rosengren said the slowdown in hiring last month effectively heightens his sensitivity to the economy's performance the rest of the year. If it grows at less than a 2 percent pace, or if unemployment rises from 5.1 percent now, he would probably prefer to wait until next year for the much-anticipated rate hike.

The straightforward comments could help clarify what the US central bank means by its "data-dependent" approach to deciding when to tighten monetary policy, an approach that has caused confusion among investors and economists since the Fed delayed the policy change last month.

Rosengren, a dovish Fed official who regains a vote on policy next year, said he does not need to see actual evidence that inflation or wages are rising in order to back an initial rate hike. But the labour market, which is much improved since the recession, is key.

"This was definitely a weak employment report," he told Reuters over the weekend at the Boston Fed.

"We need to understand whether [it] was an anomaly or whether it was symptomatic of greater weakness in the economy than we were expecting," he added. "One report alone doesn't tell us that, so we'll have to see the incoming data."

The US economy added a lower-than-expected 142,000 jobs in September, according to a government report that also slashed August employment growth and that showed little in wage gains for workers. Factories were hit particularly hard, reflecting a global economic slowdown and the strong dollar.

Investors reacted Friday by cutting the perceived chances of a Fed rate hike in December to only 30 percent, this despite repeated assurances in recent weeks from Chair Janet Yellen and other Fed policymakers that they expect to act this year.

Asked whether he would back a rate hike if the market probability remained at 30 percent, Rosengren said: "yes, if it was the appropriate action to take."

"I don't think the markets have veto power over what we're going to be doing," he said, adding that those probabilities would likely rise if economic data improves.

The Fed has kept its key rate near zero since the depths of the financial crisis in late 2008.