RIVERWOODS, Ill./CHATTANOOGA, Tenn.: U.S Federal Reserve policymakers can wait on any further interest rate hikes until they have a better handle on whether growing risks will undercut an otherwise solid U.S. economic outlook, several policymakers said on Wednesday.
After months of tumult in the stock market and rising speculation over a coming recession, presidents of four of the 12 Fed regional banks said they wanted greater clarity on the state of the economy before extending the central bank's rate hike campaign any further.
Three of the four, Charles Evans of Chicago, Eric Rosengren of Boston, and James Bullard of St. Louis, are voting members this year on the Federal Open Market Committee, the bank's 10-member policy-setting panel.
Bullard has long been critical of the Fed's rate increases, begun in December 2015, but the caution from Evans and Rosengren is new, even if they both believe growth will remain solid and rates will probably need to rise more.
The fourth president, Raphael Bostic of Atlanta, said there was no urgency to raise rates further at this juncture.
The remarks from the four come less than a week after Fed Chairman Jerome Powell eased market concerns that policy makers were ignoring signs of an economic slowdown. Powell said he was aware of the risks and would be patient and flexible in policy decisions this year.
Rosengren on Wednesday used those same two adjectives, while Evans said he would be "cautious."
"I think they have certainly changed their tune," said Eric Stein, a portfolio manager for Eaton Vance who attended Rosengren's talk. "If financial conditions continue to ease from here (as they have to start the year) and growth stays strong, I think they will still look to hike, but for now a wait and see approach is prudent."
The new tone comes after the U.S. stock market dropped precipitously in the fourth quarter of 2018, suffering its worst December performance since the Great Depression. Other signs of tightening financial conditions surfaced as well, including a sharp slowdown in issuance of corporate bonds.
Short-term U.S. interest-rate futures are now pricing in less than a 2 percent chance of a rate hike this year, and traders see a one-in-four chance of a rate cut by next January.
That stands in stark contrast to forecasts from the Fed released after the central bank's fourth 2018 rate hike in December. Those forecasts called for two more rate hikes this year.
Evans, who has been among the most vocal backers of gradually tightening U.S. monetary policy, told reporters Wednesday he still believes the Fed will need to deliver three more rate hikes this year.
But, in his first public comments since November, he nodded to an array of "tough-to-read" factors highlighted by the recent market selloff. With inflation showing no signs of breaking above the Fed's 2-percent target, he said, "we have good capacity to wait and carefully take stock of the incoming data and other developments."
Rosengren similarly said he expects solid growth this year and said he suspects financial markets are "unduly pessimistic." But in a break from speeches last year, when he emphasized the risks of allowing unemployment to stay below sustainable levels for too long, Rosengren on Wednesday highlighted potential threats to growth, and said he was taking on board the cautionary signals from markets, including rising bets on rate cuts.
"There should be no particular bias toward raising or lowering rates until the data more clearly indicate the path for domestic and international economic growth," Rosengren told the Boston Economic Club. "I believe we can wait for greater clarity before adjusting policy."
Bullard, meanwhile, told the Wall Street Journal that while the Fed had "a good level of the policy rate today," there was no rush to push them higher.
Minutes from that meeting will be released later on Wednesday and could shed more light on how policy makers assessed the economy as they agreed to raise rates and, at that time, projected two more increases in 2019..
Overall, that marked the ninth increase of a quarter percentage point since December 2015, when the Fed began lifting interest rates from near zero, where they had been since the financial crisis in 2008.
Atlanta Fed President Raphael Bostic, who earlier this week said the Fed was likely to need at most a single rate increase this year, on Wednesday said his view was driven by conversations with business executives, who say they have become more defensive in preparing for slower growth by paying down debt and holding off on new plans.
Those conversations "are not consistent with the business sector ramping up," Bostic told the Chattanooga Area Chamber of Commerce. Bostic, who backed all four rate hikes in 2018 as an FOMC voter, does not have a policy vote on the panel this year.
(Reporting by Howard Schneider in Chattanooga and Jonathan Spicer in Chicago; with reporting by Ann Saphir in San Francisco and Trevor Hunnicutt in New York; Writing by Dan Burns; Editing by Chizu Nomiyama)