Fed cautious on rate hike to avoid risk to markets

By Ovunc Kutlu

NEW YORK

The Federal Reserve is cautious about raising interest rates in order to avoid risks against the U.S. economy and markets, a leading financial analyst said Tuesday.

"The Fed will only make a rate hike as long as the markets allow," according to Ethan Harris, head of Global Economics at Bank of America Merrill Lynch Global Research.

Harris spoke during a teleconference in which he discussed the current outlook of the economy and said it is very unlikely the Fed would make a hawkish mistake that would weaken the economy or force it into recession.

"The last thing the Fed would want to do is to risk the economy. The Fed is still in risk management mode, and it is much more concerned with the downside risks on the economy, rather than the inflation," he said.

After seven years, the economy is finally at the point where there is improvement in the job market, he said, while pointing to the strongest U.S. jobs report in the last eight months as reported by the Labor Department last week.

But he said there is still a lot of room for improvement.

"The right way to think about the U.S. economy in the last seven years is that it's been battling a long string of headwinds, and those headwinds have not gone away," he said, referencing the post-crisis banking and housing crash that followed the 2008 financial crisis and, economic turmoil in Europe. He also included more recent concerns such as the Chinese economy, weak global growth and a strengthening dollar.

"The dollar rose 20 percent from July 2014 to January 2016. That's about a 1 percent headwind to the U.S. growth. Fiscal restraint to growth is pretty much matched one for one by the impact of a strong dollar last year," he said.

China has also been a concern as it has hurt U.S. financial markets, but unless China has a major crisis, Harris said it would be a small headwind to U.S. growth in the coming years.

The U.K.'s decision to leave the EU, also known as Brexit, has had little effect on this side of the Atlantic as the U.S. has completely overcome any negative consequences, he said.

"We got a full recovery from Brexit,” he said. “The good news is it's a very U.K.-specific effect. But, we can expect a mild U.K. recession," he added.