(Reuters) – Federal Reserve makers on Friday signaled further interest rate hikes in the future, even when they raised relatively bad concerns about a potential global slowdown that markets betting heavily that the interest rate cycle will soon expire.
PHOTO PHOTO: The Federal Reserve Building is depicted in Washington, DC, USA, August 22, 201
The growing gap between market expectations and the interest rate path Fed posted just two months ago emphasizes the biggest question against US central bankers: How much weight to give an increasing number of potential red flags, although robust US economic growth continues to push unemployment down and create jobs?
"We are at a point now where we really need to be especially data-dependent," said Richard Clarida, Fed's newly appointed vice chairman, in a CNBC interview. "I absolutely believe where the economy is today, and Fed's projection of where it goes, being neutral, would make sense," he added and defined "neutral" as the police officer somewhere between 2.5 percent and 3.5 percent.
Such a selection involves anywhere from two to six more rate hikes, and Clarida refused to say how many he would prefer.
He said he is optimistic about the rise in productivity in the United States, suggesting that he would not see faster economic or wage growth necessarily leading to higher inflation or necessarily requiring stricter policies. But he also sounded a gentle warning.
"There are some signs of global slowdown," Clarida said. "It's something that will be relevant when I think about the prospect of the US economy because it affects large parts of the economy through trade and through capital markets and the like."
Federal Reserve Bank of Dallas President Robert Kaplan, in his own interview with Fox Business, also said he saw a growth mood in Europe and China.
"It is my own assessment that global growth is going to be a bit of a headwind and it can come to the United States," Kaplan said.
Fed raised interest rates three times this year, and is expected to increase the target again next month, to an area of 2.25 percent to 2.5 percent. From September, Fed decision makers expected to raise prices three times next year, a view they will update next month.
During the past week, budding in contracts linked to Fed's policy shows that even two interest rate increases can be a stretch. The yield on food futures due in January 2020, seen by some as a point of departure for the Fed's current interest rate cycle, fell sharply to only 2.76 percent over six trading days.
At the same time, long-term inflation expectations have also fallen rapidly. The so-called breakeven inflation rate on Treasury's inflation-protected securities, or TIPS, has fallen sharply in the last month. Breakeven rate of five years TIP US5YTIP = RR hit the lowest since the end of 2017 earlier this week.
These markets move together, suggesting that traders take the view of a slowdown seriously, and limit how far the Fed will end up raising prices.
In an interview with the Wall Street Journal, Philadelphia Fed boss Patrick Harker also sounded a skeptical note.
"At this point, I'm not convinced that a December rate movement is the right move," he was quoted as saying, quoting muted inflation readings.
But not all policemen seemed worried.
Sitting with the back of a map of the world in a ballroom at the Chicago Waldorf Astoria Hotel, Chicago Fed President Charles Evans experienced the risks of his prospect, and noted that they lifted the loans that some of his colleagues raised concerns about being taken out of "big boys and girls" who understand the risk.
He told reporters that he still believes prices should rise to about 3.25 percent to soften growth and bring unemployment back to a more sustainable level, now 3.7 percent.
Asked about the risk from the global downturn, he said he hears more about it, but that it's not in the numbers yet. But for the next six months, he said, watching closely.
"It's not a good headline" about the risk of the economy right now, told Evan's reporters. "International is a bit slower; Brexit – no one has wondered about it, thanks, (the slower) housing market: I think everyone is in the mix of uncertainties that everyone faces."
"But at the moment it's not enough to disturb or adjust the path that I have in mind. "
Nevertheless, adding Evans, should not be excluded:" They could take on life easier because they are a bit more busy, if not in the forecast. "
Reporting by Ann Saphir; Additional Report by Jonathan Spicer; Editing Dan Grebler and James Dalgleish