While the Federal Reserve declined to raise rates last week, one leading official in the central bank insists that a rate hike could be coming before 2016 is over.
Speaking at a financial seminar in Bali, Indonesia, New York Federal Reserve President and CEO William C. Dudley predicted U.S. economic activity would grow by approximately two percent over the next 18 months, with residential investment showing a new vitality despite its desultory second quarter performance. However, he noted potential tumult from global markets, most notably the uncertainty created by Brexit, and he also noted the residue of the Great Recession has not fully evaporated.
“I suspect that many have come to question the view that headwinds from the financial crisis are temporarily depressing the neutral short-term rate, and that the neutral short-term rate will significantly rise in the near-future as these headwinds dissipate,” he said. “If the headwinds have not dissipated to a meaningful degree in the seven years since the recession ended, then why should one expect them to necessarily diminish quickly over the next couple of years? Evidence is accumulating that some of the headwinds are likely to prove more persistent. For example, the reduced availability of mortgage financing for those with lower credit scores seems likely to continue. Lenders now appreciate that home prices can decline significantly. Thus, they cannot rely as much on the value of the housing collateral in securing their mortgage loans, and consequently now put more weight on the credit histories of the borrowers.”
Nonetheless, Dudley would not rule out the possibility of a rate hike prior to New Year’s Eve—although he left more than a little wiggle room to avoid a firm commitment to its possibility.
“Market expectations may be putting insufficient weight on the possibility that the economy could outperform our expectations, that financial conditions could ease, or that the risks to growth from Brexit and other international developments could fade away,” he continued. “If such events were to occur, this might necessitate a faster pace of adjustment. For these reasons, I think it is premature to rule out further monetary policy tightening this year. As I said before, it depends on the data, broadly defined, and, as we all know, that is not something one can predict with any accuracy.”
