New agonies, alliances as Fed debates post-liftoff plan

Wed Nov 25, 2015 1:10am EST
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By Jonathan Spicer

NEW YORK (Reuters) - Federal Reserve officials, who are expected to raise interest rates next month, are already sketching out positions for a post-liftoff debate that may blur the lines between inflation "hawks" and "doves" and make the Fed's policy less predictable.

With unemployment steadily falling, Fed policymakers have been waiting for a return of healthy price and wage increases. But those have yet to appear, prompting some within the central bank to begin doubting whether their tried and tested economic models still work.

Fed officials' private and public comments show that the debate now centers on whether the U.S. economy is returning to its old robust self, or whether tepid growth and resulting weak inflation and slow wage increases have become the new norm after the deep recession of 2007-2009. The Fed's 17 policymakers are also wide apart on the question how high interest rates should go and how quickly to get there.

The debate will effectively determine how far U.S. rates will diverge from those in other major economies that are still in an easing mode and how far the dollar may rise, possibly triggering an emerging markets sell-off and hurting U.S. exports.

Uncertainty as to who will prevail in the debate may also sow confusion among investors, adding to market volatility.

Now even some of the hawks, who would typically worry more about inflation risks than weak economic growth, are weighing a possibility that they may face a long spell of sub-par growth and low inflation. Others, such as Fed Chair Janet Yellen, have held to a tried and true approach of trying to preempt any pick up in prices, which they anticipate next year.

"Some of our fundamental assumptions about how U.S. monetary policy works may have to be altered," St. Louis Fed President James Bullard, a hawk, told a conference this month.

Reflecting such doubts, minutes from the Fed's Oct. 27-28 meeting showed that even as they geared up for a first rate rise in a decade several officials felt it would be prudent to plan for other ways to stimulate the economy if low rates become entrenched.   Continued...

The Federal Reserve headquarters in Washington September 16 2015.       REUTERS/Kevin Lamarque