Fed's Brainard: global troubles weighing on U.S., may delay rate hike

Tue Jun 2, 2015 1:42pm EDT
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By Howard Schneider

WASHINGTON (Reuters) - It may be impossible for the Federal Reserve to raise interest rates until the rest of the world economy improves, Fed board member Lael Brainard said on Tuesday, in the most direct acknowledgement yet of how weak global markets could handcuff the U.S. central bank.

Brainard, who is hyper-attentive to the impacts of globalization given her prior role as head of international affairs at the U.S. Treasury, sketched out a world in which a strong dollar, weak overseas demand, and even Chinese wage rates were holding back the U.S. recovery and potentially slowing the Fed's progress towards more normal monetary policy.

Absent convincing evidence otherwise, Brainard said the dismal performance of first-quarter U.S. gross domestic product may signal a more permanent slowdown, and that the Fed needed to enter a phase of "watchful waiting" before raising rates. Her remarks further weighed against the already slim chance of a rate hike at the June policy-setting meeting, and could mark an even more indefinite hold on a decision that had seemed locked in for this fall.

"The underlying momentum of the recovery has proven relatively susceptible to successive headwinds," Brainard said. The risks associated with a Greek default, a slowdown in China, and continued problems in Europe "may persist for some time," she said. "There is value to watchful waiting while additional data help to clarify the economy's underlying momentum."

Brainard has been on the Fed board for a year now, and has kept a relatively low public profile. But she used a speech at the Center for Strategic and International Studies on Tuesday to give her most extensive policy remarks yet, sounding a bearish note based on the issues she knows best.

Brainard indicated that given the strong dollar, the impact low oil prices are having on U.S. energy investment, and other factors, the time for a rate hike may still be far off.

"We do experience cross currents from abroad and they do affect our recovery and they affect the policy response," Brainard said. "Net exports have been a big drag. That means manufacturing is weaker than it would otherwise be and that does transmit into the labor market."

Her comments set her apart from a sizeable group of Fed officials who have maintained that the international effects on the U.S. will prove "transitory," and in particular that low oil prices will encourage consumer spending. Several months into oil's swoon, that isn't happening.   Continued...

Cargo containers sit idle at the Port of Los Angeles as a back-log of over 30 container ships sit anchored outside the Port in Los Angeles, California, February 18, 2015.   REUTERS/Bob Riha, Jr.