A divided Fed pits world's woes against domestic growth

Sat Sep 19, 2015 6:40pm EDT
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By Howard Schneider and Jonathan Spicer

NASHVILLE, Tenn (Reuters) - Federal Reserve policymakers appeared deeply divided on Saturday over how seriously problems in the world economy will effect the U.S., a fracture that may be difficult for Fed Chair Janet Yellen to mend as she guides the central bank's debate over whether to hike interest rates.

Though last week's decision to again delay an interest rate increase was near-unanimous, drawing only one dissent, St. Louis Fed President James Bullard called the session "pressure-packed" as members debated whether global uncertainty or the continued strength of the U.S. economy deserved more attention.

In the end the committee felt that tepid global demand, a possible weakening of inflation measures, and recent market volatility warranted waiting to see how that might impact the U.S.

Bullard, who does not have a vote this year on the Fed's main policy-setting committee, said he would have joined Richmond Fed President Jeffrey Lacker's dissent, and worried the central bank had paid too much attention to recent financial market gyrations.

Markets sold off sharply this summer over concerns about a slowdown in China and weak world growth, leaving Fed officials to vet whether that reflected a short-term correction or more fundamental problems on the horizon.

"Financial markets tend to wax and wane, sometimes suddenly. Monetary policy needs to be more stable," said Bullard, who in prepared remarks here to the Community Bankers Association of Illinois said he did not think the Fed "provided a satisfactory answer" to why rates should stay near zero.

The economy is near full employment, and inflation will almost certainly rise, Bullard said, leaving the Fed's near seven-year stay at near zero rates out of line with the broad economic picture.

In a statement Lacker said he felt the current low rates "are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets."   Continued...

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