September rate hike 'less compelling'

A top Federal Reserve official said Wednesday that the economic turmoil in China has eroded the argument for raising interest rates in September.

The need to begin normalizing monetary policy next month "seems less compelling to me than just a few weeks ago," said William Dudley, head of the Fed's New York branch and a voting member of the rate-setting Federal Open Market Committee.

"The slowdown in China could lead... to a slower global growth rate and less demand for the US economy," he said.

He stressed that there were other factors involved in the FOMC's monetary policy decision, and pointed to the mostly positive data coming out of the US economy recently.

However, he stressed, "at the end of the day, we're concerned about the outlook, how is the economy going to perform in the future. It's not just how we are performing today."

"And there, international developments and financial market developments do have relevance because they can impinge and affect the economic outlook."

Dudley's remarks were in response to questions during a briefing on the state of the New York regional economy.

The crash of China's stock markets and the limited impact of Beijing's efforts to calm the situation has raised fears of a greater-than-expected slowdown in the world's second-largest economy that could drag down growth globally.

Some economists have called on the FOMC to not go through with a long-anticipated increase in the federal funds rate at its September meeting, given the global markets turmoil.

It would be the first interest rate increase in nine years, and would lift the fed funds rate from the zero level, where it has sat since the financial crisis of 2008.

Dudley cautioned that sharp market movements in the short term would not necessarily change the picture for US economic strength.

It would take a "large and prolonged drop in the stock market" to significantly impact household wealth and convince people to slow spending and investment, he said.

"That could have implications for the outlook."

"It's important not to overreact to market developments because it's unclear whether it's just a temporary adjustment or something more persistent," he added.

Asked about recent comments from some economists that the Fed should reverse course and consider more stimulus, including reviving its quantitative-easing (QE) program, Dudley said: "I'm a long way from QE; the US economy is performing quite well."
Source: AFP