US still too weak for rate rises, says Fed official

The US economy is still too weak for the Federal Reserve to raise interest rates, a senior official has warned, as he mounted a staunch defence of the central bank against a campaign in Congress to limit its independence.

Eric Rosengren, president of the Federal Reserve Bank of Boston, struck a dovish tone, warning that conditions in the US economy had deteriorated since March and that inflationary pressure were still subdued for the Fed to begin tightening monetary policy.

The warning comes only days after minutes from the March meeting of the Fed showed policy makers were split over the right moment to start tightening monetary policy.

"Several" members of the Federal Open Market Committee expected interest rates to rise in June on the back of improvements in the economic outlook.

However, others believed that falling oil prices and the strong dollar would keep inflationary rate at bay, meaning that the Fed could wait until later this year or even 2016 before hiking rates.

Mr Rosengren said that the Fed had set two conditions for raising rates in the US. The Committee had to see "further improvements in the labour market" and the FOMC had to be "reasonably confident" that inflation was heading back to the Fed's 2 per cent target.

"I do not think that either condition has been met," said Mr Rosengren, who added he expected economic growth in the first quarter of 2015 to have slowed down below the 2.2 per cent registered in the fourth quarter of last year.

While the Boston Fed president acknowledged the weaknesses in economic activity since the start of the year were the result of an unusually cold winter, he insisted that in his view "incoming data would need to improve fully to satisfy the Committee's two conditions … to raise rates".

Mr Rosengren noted that the FOMC had revised its expectations for unemployment and the future path of interest rate over time. These changes undermined the case for setting monetary policy using simple rules, which assume these variables to stay constant over time.

"The variability of these two key estimates highlight just one of the many perils of using simple rules to constrain monetary policy making," he said.

The Boston Fed president was responding to a Republican push in Congress to subject the Fed to greater congressional oversight.

Policy makers, including Rand Paul, the libertarian senator from Kentucky and now a presidential candidate, have launched a campaign to "audit the Fed". They would also like the central bank to follow mechanical rules such as one proposed by economist John Taylor, rather than exercising discretion in setting monetary policy.

But Mr Rosengren said the Fed was one of the most transparent institutions in the world, pointing to the fact that the central bank already produced minutes and transcripts, while chairperson Janet Yellen also delivered press conferences.

"Congress has been concerned about transparency. For monetary policy we are actually quite transparent in the US," he said during the question and answer session after a speech at Chatham House in London.

The Boston Fed president said he did not expect inflationary pressures to resume rising any time soon. He pointed to the sharp fall in 10-year bond yields, which he said showed investors did not believe central banks would hit their inflation target.

""It's going to be several years before we hit the 2 per cent inflation target," he said.

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