US executives fear Fed’s power may be curtailed by EU

Views contrast with market expectations of imminent increase in benchmark rate

Wall Street executives said the US Federal Reserve’s ability to raise interest rates will be restrained by weak economic growth abroad and slow inflation at home.

Attending the World Economic Forum's annual meeting in Davos, Switzerland, executives from Blackstone Group, Goldman Sachs and BlackRock were among those to question how soon or how fast the Fed will be able to tighten monetary policy in 2015.

Raising of rates

“What I am concerned about is the ability of the US to raise rates with what’s going on with the rest of the world,” Goldman Sachs president

Gary Cohn


said .

Blackstone’s chief executive officer Stephen Schwarzman said the Fed’s policy shift will be “probably slower than people think”.

Their comments challenge expectations in financial markets and among most economists that Fed chairwoman Janet Yellen and her colleagues will soon raise their benchmark rate from near zero, the first increase since 2006, as the US expansion accelerates.

Even as he predicted a quarter-point increase in the key US rate before the end of the year, BlackRock's chief executive, Larry Fink, said policymakers would then "pause and wait so I don't think you're going to see the normalisation any time soon". He predicted that meant the dollar may not rise as fast as some expect.

Fed officials are already starting to review their outlook for the world’s largest economy as global weakness and disappointing data on US consumer spending test their resolve to raise rates in 2015.

San Francisco Federal Reserve president John Williams last week said he will trim his US growth estimate because of slower expansion elsewhere. The lacklustre economic growth abroad, especially in Europe, and the fact that inflation remains below the Fed's goal were cited by those in Davos as reasons to expect the Fed to act slowly – if at all.

The dollar’s 19 per cent gain against the euro and 13 per cent climb versus the yen over the past year were also identified.

The International Monetary Fund this week made the steepest cut to its global-growth outlook in three years, reducing it to 3.5 per cent for 2015 from 3.8 per cent.

Meantime, the Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 1.2 per cent in November from a year earlier and has lingered below the Fed’s 2 per cent goal for 31 straight months.

"The Fed should not be fighting against inflation until it sees the whites of its eyes," former US treasury secretary Larry Summers said. "That is a long way off."

By contrast, Morgan Stanley chief executive James Gorman said he would "put good money on a rate hike this year", as unemployment declines and after the balance sheets of banks, consumers and corporations have improved.

Full employment

The US unemployment rate stood at 5.6 per cent in December, the lowest since June 2008 and just above the top end of the Fed’s 5.2 per cent to 5.5 per cent estimated range for full employment.

“In this environment, how could we not have a rate increase?” Mr Gorman asked. “The only question is which month. If we have a surprise I think it’s more likely to surprise on the earlier side.”

He found an ally in IMF managing director Christine Lagarde. "The Fed is probably going to raise rates this year," she said. – (Bloomberg)