Fed's 'nearly balanced' language no bar to Sept rate rise

Thu Jul 30, 2015 5:26pm EDT
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By Howard Schneider

WASHINGTON (Reuters) - The U.S. Federal Reserve will not need to see balanced risks to the economy to proceed with an interest rate hike in September, according to former Fed officials and a review of central bank statements through recent turns in policy.

In its latest statement, released Wednesday, the Fed said it continued to judge the risks to the U.S. economy as "nearly balanced," meaning it still sees a greater threat of a new downturn than it does of accelerating inflation and excessive growth.

Wall Street closely watched the language as a possible tip-off to a September rate hike. Removal of the word "nearly" would have been seen as a sign that liftoff was almost certain, ending more than six years of near zero rates.

But a review of Fed statements over the past 10 years indicates the risk language used by the Fed is a poor predictor of "regime change." (Graphic: link.reuters.com/zyn35w)

A major change in Fed policy in June 2004 was with language about risks that is similar to that of the current statement. Prior to its decision to begin raising rates at that meeting, the Fed had for several months judged the risks to the economy as "roughly equal." It kept that characterization at the June meeting, and for nearly a year after that.

Today's situation may be similar. Potential risks from overseas are unlikely to disappear between now and the Fed's next meeting in September, for example. But that will not necessarily hold the Fed back.

"Risks seem a little tilted to the downside. China, oil, Europe," said Cornerstone Macro economist Roberto Perli, a former Fed board staffer. But the current risk language "doesn't represent a major constraint... Policy is so accommodative, to say risks are 'nearly balanced' could justify a 25 basis point increase."

The Fed will have nearly a two-month dose of data to pore over at its Sept. 16-17 meeting to either confirm the economy's strength or decide on a continued pause. That includes Thursday's report showing that U.S. growth rebounded over the last three months to a 2.3 percent annualized rate, a positive surprise.   Continued...

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst