By Michael S. Derby
NEW YORK, Oct 1 (Reuters) - Two of the Federal Reserve’s top policymakers this week drove financial market participants to price out expectations of an interest rate increase at the central bank's late October policy meeting as they made a case to take in more data before deciding what’s next for monetary policy.
“There is no need for urgency” on changing the current setting of monetary policy, Federal Reserve Bank of New York President John Williams said on Tuesday at an appearance
at the University at Buffalo. Williams also serves as vice chair of the central bank’s rate setting Federal Open Market Committee.
Federal Reserve Vice Chair Philip Jefferson on Thursday echoed that view.
“Any future adjustments in policy should be determined by carefully examining trends in the data, the evolving outlook, and the balance of risks,” the bank's second-in-command said in the text of remarks to the Darden School of Business at the University of Virginia.
Noting that markets are “reassessing” the outlook amid rising bond market yields, Jefferson said, “my colleagues and I will need to come to our own judgment, which may take more time,” adding: “With more data in hand, such trends may lend themselves to better discernment, as may the appropriate stance of monetary policy.”
Williams’ comments were the pivotal event for markets and helped wash away expectations that the Fed would raise rates at an October 27-28 FOMC meeting. Jefferson’s comments helped lock in the shift in sentiment.
Global brokerages now largely expect the Fed to hike rates only once more this year, in December rather than in October.
'UNUSUALLY CLEAR' GUIDANCE
Jefferson “has confirmed the message from NY Fed President Williams: the Fed does not expect to deliver a back-to-back rate hike at its coming October meeting and will take more time to consider evolving economic conditions,” said analysts at Evercore ISI. “We think the joint message from Jefferson and Williams is authoritative” in an environment where Fed Chairman Kevin Warsh is not providing much if any guidance on where interest rates are heading.
SGH Macro Chief US economist Tim Duy said "we think Williams needed to be unusually clear because market pricing for rate hikes was running away from the Fed. This is a consequence of the lack of forward guidance” from the Fed’s leader, Duy told clients.
The two Fed officials spoke after the Fed lifted its interest-rate target by a quarter percentage point at its mid-September policy meeting, to between 3.75% and 4%. Official forecasts also nodded toward boosting rates one more time this year.
The high levels of inflation that drove the Fed to hike rates last month drove investors to price in even more hikes than officials projected, including a strong view that the Fed would raise rates at its late October FOMC meeting. Markets now see the Fed holding steady then but hiking rates at the December 8-9 FOMC meeting.
HIKES STILL AHEAD
Other Fed officials are also on board with taking some time before changing rates, including one who’s worried the current state of interest rate policy isn’t slowing the economy much if at all.
"I'm open-minded" about how the Fed proceeds with rate increases and "I don't have a strong view" as to whether the next hike should happen at month’s end, Minneapolis Fed President Neel Kashkari told Reuters in an interview Thursday.
The official noted that in his current forecast he has one more increase this year and another for next year. But even then, Kashkari, who was ahead of many at the central bank in calling for rate hikes over the summer, noted that the economy has outperformed his expectations since the September meeting.
Kashkari also suggested there are upside risks to the rate outlook. "If the economy proves to just be incredibly resilient and inflation therefore is probably stickier than I appreciate, then policy could need to go higher yet than I'm anticipating at this moment,” he said.
Kashkari also noted that amid strong employment and economic output, it appears that “policy is probably not particularly restrictive right now.”
The three policymakers all expect inflation to ease over time but are wary about how quickly that might happen.
Jefferson said he sees inflation staying "elevated" in the near term "before resuming its decline toward our 2% goal as the effects of energy and other price shocks fade." But he added, "I view risks to my inflation forecast as tilted to the upside due to recent geopolitical developments and stronger-than-anticipated aggregate demand."
The next major data point for Fed officials to weigh is the Friday release of the September jobs report. With recent hiring data showing stability, Fed officials have said they have the space they need to concentrate rate policy on cooling inflation, which makes it unlikely the upcoming hiring data will again rewrite the rate policy outlook.
(Reporting by Michael S. Derby; Editing by Paul Simao and Jonathan Spicer )
