SAN FRANCISCO/ATLANTA Thu Mar 19, 2015 5:41pm EDT
The Federal Reserve should err on the side of looser policy, a leading dove said on Thursday, a day after Fed officials dramatically cut their forecasts for the economy's growth, inflation and rate hikes at the U.S. central bank's policy meeting.
Chicago Fed President Charles Evans said in a research paper there was a case for keeping interest rates at zero until at least 2016, arguing that the risks of a premature rate hike may be rising if the economy is in fact weakening.
"In this paper, we demonstrate that the zero lower bound on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty," said in a paper published by the Brookings Institution.
Evans' renewed push for continued easy money comes a day after Fed officials gave their own clear hints their confidence in a near-term rate hike may be ebbing.
Over the past year the Federal Reserve has banked on a central hope: that the U.S. recovery would remain strong enough for long enough that they could bring interest rates and monetary policy back to normal.
This week, they gave hints of what they have feared the most: ebbing growth that leaves rates stuck at the zero lower bound and leaves the central bank few choices if things turn down in a serious way.
A close reading of Fed officials' forecasts released Wednesday shows the risks: the predicted range of long-run growth, or the economy's potential over time, and for short-run growth are starting to merge. Countries recovering from recession generally go through a period of above-average growth as businesses and households make up for lost time in spending and investment.
The U.S. recovery from the 2007-8 financial crisis is already the most lethargic since World War Two.
The chances of a June rate hike were dealt a severe blow at this week's Federal Open Market Committee meeting thanks to the sharply reduced economic outlook in which Fed officials slashed their median estimate for the federal funds rate, the key overnight lending rate, to 0.625 percent for the end of 2015 from their 1.125 percent estimate in December.
The Fed is one of the two central banks in the developed world that had been on the cusp of a rate hike, along with the Bank of England. Others, such as the European Central Bank are at the start of substantial quantitative easing programs, while the Swedish central bank surprised with a move to deeper negative rates just ahead of the Fed decision.
The Bank of England's chief economist on Thursday sounded a warning over the risk that falling inflation made a rate cut there a possibility, a move that would put the Fed in even more of an outlier position.
"The economy is a little weaker, and it is weaker in areas that would be directly affected by a rate hike: housing and exports," said Robert Shapiro, co-founder of consulting firm Sonecon.
A weaker economy is that much more vulnerable to shocks when interest rates are near zero because monetary policy at that point has few effective tools to jumpstart growth, he said, adding that Fed Chair Janet Yellen is well aware of those risks.
Yellen on Wednesday put an optimistic gloss on what was otherwise a sharp downshift in the Fed's view of the U.S. economy, saying she still feels the economy has "considerable underlying strength" and that inflation, now uncomfortably low, will likely head back to 2 percent.