U.S. Fed official calls for prudent approach to rate hikes

A top Federal Reserve official on Monday called for continuing taking a prudent approach to further increasing interest rates because of potential weakness in the U.S. and global economy.

"In today's new normal, the costs to the economy of greater-than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness," Fed governor Lael Brainard said in a speech at the Chicago Council on Global Affairs.

"This asymmetry in risk management in today's new normal counsels prudence in the removal of policy accommodation," she said, adding that this approach has served the U.S. economy well in recent months.

Brainard highlighted reasons to raise rates with caution: U.S. inflation has been persistently below the target of 2 percent; labor market slack has been greater than anticipated; financial transmission from foreign market is strong and poses a risk; and the ability of monetary policy to respond to shocks is asymmetric.

"In particular, to the extent that the effect on inflation of further gradual tightening in labor market conditions is likely to be moderate and gradual, the case to tighten policy preemptively is less compelling," she said, suggesting that the Fed should wait for more evidence of sustained inflation before another rate hike.

Fed governor Daniel Tarullo also said last week that U.S. inflation should pick up "in a sustainable way" to be at the central bank's target of 2 percent rather than being below the target before Fed raising rates again.

Analysts said dovish remarks made by these two influential Fed officials would make it harder for the central bank to raise rates as soon as in the next policy meeting on Sept. 20-21.

About 74 percent of 62 economists surveyed by The Wall Street Journal this month also believed that the Fed will wait until December to raise rates.

The Fed raised its target range for the federal funds rate by 25 basis points to 0.25-0.5 percent in December last year, the first rate hike in nearly a decade.

However, a slowdown in global economy since the start of this year and other global financial risks have made Fed policymakers cautious to hold off on any further rate hikes. Endit