The Federal Reserve needs to avoid inadvertently crimping US growth given rising nervousness among businesses about the outlook at home and abroad, a senior policymaker said.
Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said there had been a marked change in corporations’ mood since a year ago, as executives digest hazards including trade tensions and slowing growth in Europe and China.
“It is important that we do not go too fast and act in a non-prudent way that winds up inadvertently restricting the economy,” Mr Bostic said at the European Financial Forum in Dublin on Wednesday. He described the slowdowns in China and Europe as significant.
The Fed is taking a “patient” approach to rates policy after increasing rates four times last year. It is being helped in its caution by tame inflation. The consumer price index has risen 1.6 per cent in the past 12 months, according to new data for January, slower than the pace in December. The core rate of inflation, which excludes food and fuel, held at 2.2 per cent.
Gita Gopinath, who took over as the IMF’s top economist at the beginning of the year, said in an interview last week that the Fed’s “pivot” towards putting tightening on hold would have a positive impact.
“The fact that the Fed has put a pause on raising rates is going to provide a lot of support to the economy,” Ms Gopinath told the Financial Times. “We endorse the Fed view of having a data-driven approach.”
Mr Bostic said that with rates closer to neutral levels — which neither stimulate the economy nor hold it back — policymakers need to tread carefully as they assess how the economy is responding. The extra uncertainty over the outlook amid US trade tensions with China and decelerating foreign demand only added to arguments for caution.
The policymaker said officials in the Atlanta Fed are closely examining the Fed’s balance sheet policy, as the central bank seeks to determine how much lower it should allow its asset holdings to fall. The balance sheet was boosted to $4.5tn during the Fed’s financial crisis interventions, but it has since reduced to around $4tn.
A key point of the debate is determining commercial bank demand for reserves at the central bank. Mr Bostic said he was hoping to form a view on this in the next “several months”.
Loretta Mester, the president of the Cleveland Fed, said on Tuesday that the Fed would be finalising its plans for ending the runoff of its balance sheet at “coming meetings”. She said the Fed has already made “considerable progress” in normalising the size of the balance sheet. Reserves are now around $1.6tn, down 40 per cent from their peak levels, she said.
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