Dreary data tilts Fed to later liftoff

If a December rate hike by the Federal Reserve is looking less likely, it’s not because debate among policymakers has gone increasingly public in recent days, but because the economic data are shifting against those in favor of a move this year.

Figures on retail sales, producer prices and inventories released this week all disappointed, suggesting weakness in inflation and third-quarter growth. Those come on the heels of a September jobs report that fell short of estimates and cautious comments by Fed governors Lael Brainard and Daniel Tarullo that argued for patience on liftoff.

“What’s new is just the way the data has come in,” said Mark Gertler, a New York University economist who has co- authored research with former Fed Chairman Ben S. Bernanke. “The data does tilt the committee toward waiting, there’s no question.”

Investors have cut the probability of a 2015 rate rise to less than 30 percent based on pricing in federal funds futures, down from around 60 percent a month ago, assuming the effective fed funds rate is 0.375 percent after liftoff.

Gertler and other economists leaned against the idea that remarks this week from the two Fed governors represented a new split among members of the Federal Open Market Committee or decreased the odds of a 2015 rate hike.

Brainard on Monday argued that persistently low inflation and a slowdown in China, among other factors, meant the Fed faced a greater risk of raising rates too soon than of moving too late. Brainard declined to say if she favored raising rates this year or next, though her comments were widely interpreted as making a case for delaying liftoff into 2016.

Tarullo, in an interview on CNBC, was even clearer, saying he’d rather wait until next year.

The remarks revealed a division between the pair of governors and Fed Chair Janet Yellen, who said last month she expected a rate rise would be warranted this year. That placed her among 13 of 17 committee members with that view, according to forecasts submitted by FOMC members for their Sept. 16-17 meeting in Washington.

In that meeting, the committee voted to leave the benchmark interest near zero, where it’s been since December 2008. Minutes of the gathering showed officials preferred to wait for more information to help gauge whether the slowdown in China would affect their outlook for U.S. inflation and growth.

The committee is scheduled to meet twice more in 2015. If the Fed is to raise rates this year, most Fed watchers expect it to happen in December.

Jonathan Wright, a professor at Johns Hopkins University in Baltimore and a former Fed economist, said the Brainard and Tarullo comments were “quite significant.”

“They are implicitly threatening to dissent in December,” he said, adding, “the tradition on the FOMC is that dissent from the board is very rare.” Even so, Wright is still betting on a move in December.

“It’s going to be very hard for the FOMC, after all they’ve said, not to go in December,” he said.

Other former Fed economists played down the governors’ remarks even further.

“Differing opinions don’t imply dissents,” Roberto Perli, now a partner at Cornerstone Macro LLC in Washington, wrote in a note to clients, saying it’s possible that Tarullo and Brainard will still vote with the committee if it decides for a rate hike in December.

Perli also noted that Tarullo and Brainard were probably among the four FOMC members who, as recorded in September forecasts, were already against raising rates this year.

“They did not change their views in the days since the FOMC meeting,” he wrote. “Their opinions would have been a lot more significant if they had.”

Robert Eisenbeis, chief monetary economist at Cumberland Advisors in Sarasota, Florida, and a former Atlanta Fed research director, said the open debate is more a product of challenging economic conditions than of any changing dynamic within the board or FOMC.

“When you’re trying to navigate in uncharted waters, you would expect and hope that reasonable people would have differing views,” he said. “I think that’s a positive.”

Gertler agreed. “You look at turning points, when the data is murky, and see a lot of public discussion going. That’s not unusual,” he said.

“December is still a long way off,” added former Fed Governor Laurence Meyer, who is now senior managing director of Macroeconomic Advisers LLC. “The next employment report, the next retail sales report, all these things are very important” in determining whether the Fed acts in December.

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