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(Bloomberg) -- Wall Street executives said the 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 LP, Goldman Sachs Group Inc. and BlackRock Inc. were among those to question how soon or how fast the Fed will be able to tighten monetary policy in 2015.
“What I am concerned about is the ability of the U.S. to raise rates with what’s going on with the rest of the world,” Goldman Sachs President Gary Cohn said on a Bloomberg panel at the Alpine conference. Blackstone’s Chief Executive Officer Stephen Schwarzman said in an interview that 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 Chair Janet Yellen and her colleagues will soon raise their benchmark rate from near zero, the first increase since 2006, as the U.S. expansion accelerates.
Even as he predicted a quarter-point increase in the key U.S. rate before the end of the year, BlackRock’s CEO Larry Fink said policy makers would then “pause and wait so I don’t think you’re going to see the normalization any time soon.” He predicted that meant the dollar may not rise as fast as some now expect.
Fed officials are already starting to review their outlook for the world’s largest economy as global weakness and disappointing data on U.S. consumer spending test their resolve to raise rates in 2015. San Francisco Fed President John Williams last week said he will trim his U.S. growth estimate because of slower expansion elsewhere.
The lackluster 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 percent gain against the euro and 13 percent 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 percent for 2015 from 3.8 percent. Meantime, the Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 1.2 percent in November from a year earlier and has lingered below the Fed’s 2 percent goal for 31 straight months.
“The Fed should not be fighting against inflation until it sees the whites of its eyes,” former U.S. Treasury Secretary Larry Summers said on the Bloomberg panel. “That is a long way off.”
By contrast, Morgan Stanley CEO 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.
The U.S. unemployment rate stood at 5.6 percent in December, the lowest since June 2008 and just above the top end of the Fed’s 5.2 percent to 5.5 percent estimated range for full employment.
“In this environment, how could we not have a rate increase?” Gorman told Bloomberg Television. “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 International Monetary Fund Managing Director Christine Lagarde.
“The Fed is probably going to raise rates this year,” she said on the Bloomberg panel.
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