DUDLEY SETS A HIGH BAR FOR SEPTEMBER FED RATE MOVE / THE WALL STREET JOURNAL

Dudley Sets a High Bar for September Fed Rate Move

By Jon Hilsenrath


Central bank reporters like myself spent much of Wednesday trekking out to Jackson Hole, Wyoming hoping to get a read on the U.S. monetary policy outlook at the Federal Reserve’s annual mountain retreat, which starts Thursday evening. Turns out we would have been better off on a subway to lower Manhattan.

In a press briefing there, New York Fed President William Dudley set a high bar for the Fed to raise short-term interest rates at its September 16-17 policy meeting. Mr. Dudley, part of Chairwoman Janet Yellen’s inner circle of decision makers, explicitly didn't rule out a rate increase at the September meeting, but his comments made clear the Fed’s senior leadership now has serious reservations about moving in a few weeks.

“International developments have increased the downside risk to U.S. economic growth somewhat. The slowdown in China and the sharp fall in commodity prices are increasing the strains on many emerging-market economies, and this could lead to a slower global growth rate and less demand for U.S. goods and services,” Mr. Dudley said. “International developments have also contributed to recent financial-market volatility and a tightening of financial conditions as equity prices have declined and credit spreads have widened, with the decline in long-term rates a partial offset.”

He continued, “At this moment the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago.”

The Wall Street Journal has posted a full transcript of his comments here.

Mr. Dudley’s assessment came with its share of caveats. It is important not to overreact to market swings, he said. Recent data suggest the domestic U.S. economy is actually performing quite well, he added. The Fed will learn more about the economy’s performance and financial conditions between now and the September meeting and if things settle down its view could swing back toward supporting a rate move by then, he said.

While a rate move then is possible, it seems unlikely. Some of the economic data the Fed gets before its September meeting will be “stale,” as Mr. Dudley described it, meaning it will record the economy’s performance before the latest market tumult and won’t reflect whether business conditions shifted since big stock market declines and a bout of risk aversion in bond markets. He singled out the release next week of a U.S. jobs report for August by the Labor Department. Data for the report were collected the week of August 12, before market turmoil.

If the Fed wants a higher comfort level that the U.S. economy remains a solid footing before raising rates, it looks like it is going to need more time. The long wait for liftoff continues.