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Analysis

Fed raises rates but turns dovish

by Darrell Delamaide in Washington

Thu 29 Jun 2017

Fed raises rates but turns dovish Enlarge Chart loading Image

The Federal Reserve, as expected, increased interest rates by 0.25 percentage points on 14 June, but many analysts are beginning to question whether there will be any more this year.

James Bullard, the St. Louis Fed chief, damped expectations in the light of softening economic outlook. 'Longer-term yields have declined, inflation expectations have weakened, and market expectations of the policy rate path have declined,' he said at a Washington University event in St. Louis. 'This may suggest that the Federal Open Market Committee's contemplated policy-rate path is overly aggressive relative to actual incoming data on US macroeconomic performance.'

Lael Brainard, a Fed governor and permanent voter on the panel, sounded dovish when she urged caution about interpreting the unemployment rate of 4.3% as 'maximum employment'. As the labour market evolves, there may be greater slack than is apparent. 'The recognition that maximum employment evolves over time to reflect changes in the economic landscape serves us well,' Brainard said at a Minneapolis Fed event. 'It puts the onus on members of the FOMC to analyse the changing features of the labour market and develop a nuanced understanding of the different margins of slack.'

Neel Kashkari, president of the Minneapolis Fed and a voting member of the FOMC this year, echoed those remarks, and expressed his worries over inflation: 'Right now inflation is going in the wrong direction, and that is concerning to me.' Kashkari was the lone dissenter in the March vote to raise rates and he doubled down on his resistance by dissenting again on the 14 June hike. Robert Kaplan, the Dallas Fed chief, said before the 14 June decision he still expects rates to rise three times in 2017 but noted that weak inflation readings in March and April could make it less of a foregone conclusion. 'I intend to be patient in critically assessing upcoming data,' he said.

In general, Fed policy-makers see the slowdown in economic growth in the first quarter as 'transitory', and will be watching to see if the downturn in inflation is temporary too. Further dovish inflation data for May have added to the sense of caution.

Darrell Delamaide is OMFIF's US editor.