Federal Reserve

UBS' Weber sticks to his guns on Fed hike call

UBS: Fed is still in risk management mode

UBS' chairman is sticking to his call for higher U.S. interest rates this year despite being wrong on his prediction for a move at last week's highly anticipated meeting.

Last week, Axel Weber told CNBC he expected the Federal Reserve to commence its tightening of monetary policy at the conclusion of its two-day review on Thursday. But instead, the central bank held its powder dry in what analysts dubbed the most important monetary policy decision in decades.

"What I said was the Fed would move sometime this year, most likely in September, because I thought the U.S. economy was strong enough to withstand a rate hike," the former president of Germany's central bank told CNBC at the sidelines of the fourth annual Singapore Summit this weekend.

He's now expecting action at December's meeting, justifying his call by referring to the fact that the Fed's dot plot signaled higher rates will arrive this year. But once rates are actually lifted, Weber doesn't anticipate an immediate tightening cycle to follow. Rather, he believes the Fed will only move at every second meeting.

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"The Fed is more in a mode where, rather than gearing monetary policy to the most likely development of the economy, they're in a risk management mode still," he said, adding that markets have reacted adversely to the cautious tone since it indicates the U.S. economy isn't as strong as expected.

Indeed, Thursday's decision to leave rates unchanged surprised several experts, including Weber, who pointed to healthy consumer spending, housing and employment reports as factors supporting a rate hike.

Axel Weber
Source: World Economic Forum

"The underlying economic data in the U.S. warrants a rate hike," Weber told CNBC last Wednesday. His sentiments were also echoed in CNBC's latest Fed Survey that showed 49 percent of respondents expected the central bank to raise rates on Thursday.

To be sure, a tepid U.S. economy wasn't the sole decision behind Fed Chair Janet Yellen's decision.

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"The Fed—unlike in the past—seemed to be focused on more global developments, also the impact of global developments on [domestic] inflation," Weber explained, noting that roughly two-thirds of U.S. inflation right now is driven by factors like the ongoing commodity slump and global output gaps.

But that global focus doesn't mean the central bank's attention has shifted to the international stage, he warned.

"The Fed is always concerned about financial stability in a more abstract, domestic sense, rather than global financial stability... It's more that the downturn in the global economy, and in particular of emerging markets and commodities, is going to have an additional impact on [U.S.] prices."

It's also taking into account the divergence of global monetary policy, he continued. The European Central Bank, People's Bank of China and the Bank of Japan are all expected to unleash further stimulus, which will have a big effect on global commodities, currencies, and stocks so the Fed is very aware of that, he said.

The central bank's real communication challenge still lies ahead, Weber concluded, citing fears that the later the Fed moves, the faster it will have to act if the economy is really strong and inflation is picking up.