Fed’s Daniel Tarullo questions 2015 rate rise
A second member of the US Federal Reserve Board has come out against a near-term increase in interest rates, adding to signs of a split at senior levels in the central bank and casting new doubts over the policy outlook.
Daniel Tarullo said in a CNBC interview that his current expectation was that it was not appropriate to raise rates this year, joining fellow governor Lael Brainard in favouring a wait-and-see approach.
That contrasts with Janet Yellen’s most recent public position, in which she said she was among those Fed policymakers who think an increase in 2015 will be appropriate. Over the weekend Stanley Fischer, the vice-chair of the Fed board, told a conference in Lima, Peru, that he also favoured an increase in 2015.
“The fact that [two] governors are publicly doing this is highly unusual,” said Michael Feroli, US economist at JPMorgan. He added: “We still believe the Yellen-Fischer leadership can pull the Committee together for a December lift-off, but in the interim the communications may continue to sound inharmonious.”
The Fed held rates unchanged in its September meeting following weeks of speculation that an increase was on the cards. Since then policymakers, including John Williams of the San Francisco Fed have suggested the decision was a close call, as they continue to hold open the prospect of a move by the end of the year.
That impression was confirmed by minutes that revealed on Tuesday that eight of 12 regional Federal Reserve banks called for an increase in the interest rate on discount window loans at the September meeting.
However Mr Tarullo suggested the Fed should wait for “tangible evidence” of a pickup in inflation before moving. Ms Yellen has said she does not have to see a significant acceleration in inflation before moving rates.
Based on a “risk-management approach” of being concerned that a premature rise might be harder to deal with than waiting a little bit longer, Mr Tarullo said: “I wouldn’t expect it would be appropriate to raise rates” this year.
In a speech on Monday Ms Brainard also questioned the wisdom of moving rates soon because there was a risk that the Fed would have to execute a costly U-turn. She questioned assumptions favoured by Ms Yellen, under which full employment is assumed to lead to higher wages and prices down the road, arguing instead that the so-called Phillips Curve has largely broken down.
The interventions further cloud muddy communications from the Fed about the policy outlook, following calls by some investors for a clearer steer on where policy is headed. Given the divisions in the central bank, however, there is a risk of further confusion ahead.
Ángel Ubide, a senior fellow at the Peterson Institute for International Economics, said it would be unprecedented in recent times if two governors went ahead and formally dissented against a vote for an increase.
However he added: “They [Brainard and Tarullo] are right that there is no need to raise rates soon if you look at outlook for inflation. The question is whether they are leading indicators, and whether Janet Yellen is now also questioning whether it is wise to raise rates in 2015. That is something we simply don’t know.”