Unfazed by market swings, Fed sticks to mid-2015 hike scenario

Fri Jan 16, 2015 4:40pm EST
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By Jonathan Spicer and Ann Saphir

NEW YORK/SAN FRANCISCO (Reuters) - Tumbling oil prices have strengthened rather than weakened the Federal Reserve's resolve to start raising interest rates around midyear even as volatile markets and a softening U.S. inflation outlook made investors push back the timing of the "liftoff."

Interviews with senior Fed officials and advisors suggest they remain confident the U.S. economy will be ready for a modest policy tightening in the June-September period, while any subsequent rate hikes will probably be slow and depend on how markets will behave.

While they are hard-pressed to explain why bond yields have fallen so low, their confidence in the recovery stems in part from in-house analysis that shows falling oil prices are clearly positive for the U.S. economy.

Internal models also suggest that a decline in longer-term inflation expectations probably does not signal a loss of faith in the Fed's 2-percent inflation goal.

Instead, the models attribute much of the recent decline in market-based measures of inflation expectations to increased investor confidence that prices will not spiral out of control, officials say.

Policymakers' public comments reflect that, as they sound unperturbed by what has been a steep drop in recent months.

"I am watching the inflation expectation numbers but not drawing a conclusion that they call for any action or that they change in any serious way my outlook," Atlanta Fed President Dennis Lockhart told reporters earlier this week.

Some of those interviewed stressed that in the light of last year's strong jobs gains waiting until mid-year represented a cautious approach rather than an aggressive one, allowing the Fed to delay the rate liftoff if needed, particularly if inflation expectations turned sharply down.   Continued...

The United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron