 "Several Fed officials say they are ready to raise rates")
Federal Reserve officials, poised to start raising the central bank's benchmark interest rate in December, are turning from the question of whether to act to how quickly the Fed should raise rates thereafter.
William C Dudley, the president of the Federal Reserve Bank of New York and the first senior Fed policy maker to signal in late August that the Fed wasn't quite ready to raise rates, said on Thursday that his reasons for hesitation have receded. Now, he said, he sees a stronger case for moving ahead.
"I think it is quite possible that the conditions the committee has established to begin to normalise monetary policy could soon be satisfied," Dudley told the Economic Club of New York. He said he saw the risks of acting too soon and waiting too long as "nearly balanced."
The remarks by Dudley, an influential advisor to Janet L Yellen, the Fed's chairwoman, reflected the tentative consensus among Fed officials that the time has come to raise the benchmark rate when the Federal Open Market Committee meets in Washington on December 15 and 16.
Investors and analysts now regard a December increase as all but certain, barring unexpected developments.
The Fed has held interest rates near zero since December 2008 to encourage risk-taking by investors and borrowing by businesses and consumers, in hopes of stimulating economic activity. Raising rates will begin to reduce that effect.
Indeed, as investors anticipate liftoff, borrowing costs already have started to rise. The average rate on a prime mortgage loan reached 3.98 per cent last week, according to Freddie Mac, the highest level since summer, when investors last expected the Fed to act.
The question now is when the Fed will raise rates for a second time, and a third.
The Fed says it plans to move slowly because the economy remains weak, a point that Dudley emphasised. Yellen has said she expects to raise rates by about one percentage point a year. But in the forecasts that Fed officials submitted in September, the predicted level of the benchmark rate at the end of 2016 ranged widely, from -0.1 per cent all the way up to 2.9 per cent.
Charles L Evans, president of the Federal Reserve Bank of Chicago, who has said in previous speeches he did not want to raise rates this year, said on Thursday that he was no longer focused primarily on the timing of the liftoff, but instead on pressing for rates to rise slowly. Evans said he expected it would be appropriate for rates to remain below 1 percent at the end of next year.
"It is critically important to me that when we first raise rates, the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases," Evans said. "If we do not, then market participants might construe an early liftoff as a signal that the committee is less inclined to provide the degree of accommodation that I think is appropriate for the timely achievement of our dual mandate objectives. I would view this as an important policy error."
Jeffrey M Lacker, president of the Federal Reserve Bank of Richmond, who has voted to raise interest rates at the last two meetings of the policy-making committee, said in an interview on Wednesday that he would prefer a pace "a little more rapid" than one percentage point a year.
Lacker said it was "too soon to tell" whether the Fed had waited so long to raise rates that it would now need to act even more quickly in order to control inflation.
"I think there's a chance we are behind the curve, but it will be a year or two before we figure that out," he said. "We have room to accelerate if we find out that we wish we'd started earlier."
Dudley's speech on Thursday was noteworthy because in recent months he had expressed misgivings about raising rates, noting in particular that the late summer volatility of financial markets might signal emerging weakness, particularly given the struggles of the global economy.
"The fundamentals supporting domestic demand look quite sturdy," Dudley said. "Also, the international outlook appears less problematic than it did just a few months ago."
Dudley noted that job growth rebounded in October, allaying concerns about a downward trend. The unemployment rate has fallen to 5 per cent, close to the level Fed officials regard as normal, and other measures, like part-time workers who want full-time jobs, also have declined.
In a speech Thursday evening, Stanley Fischer, the Fed's vice chairman, said the Fed's decision to delay liftoff in September was an appropriate response to the appreciation of the dollar, which weakened domestic growth. But he suggested there was no reason to keep waiting.
"While the dollar's appreciation and foreign weakness have been a sizable shock, the US economy appears to be weathering them reasonably well," he said. "Monetary policy has played a key role in achieving these outcomes through deferring liftoff relative to what was expected a little over a year ago."
Dudley, for his part, said he still viewed the decision to raise rates as a close call.
In particular, he noted that inflation remained weak, and he became the first senior Fed official to acknowledge a recent downturn in certain measures of inflation expectations.
Market-based measures have fallen sharply in recent years, a trend Dudley and other officials have played down, saying those measures reflect a variety of factors. But Dudley said on Thursday that survey-based measures, which the Fed has emphasised, were also slipping.
"There is some evidence that suggests that inflation expectations are under downward pressure," he said, although he hastened to add that the declines were "very modest in magnitude."
A strengthening of that downward trend would concern Fed officials because they view the stability of inflation expectations as one of the Fed's most important and valuable achievements.
"Avoiding a Japan-like experience, in which inflation expectations have become unanchored to the downside, should be an important consideration in the conduct of monetary policy," Dudley said.
He added, however, that if growth remained strong, he expects this problem, too, would go away.
©2015 The New York Times News Service
William C Dudley, the president of the Federal Reserve Bank of New York and the first senior Fed policy maker to signal in late August that the Fed wasn't quite ready to raise rates, said on Thursday that his reasons for hesitation have receded. Now, he said, he sees a stronger case for moving ahead.
"I think it is quite possible that the conditions the committee has established to begin to normalise monetary policy could soon be satisfied," Dudley told the Economic Club of New York. He said he saw the risks of acting too soon and waiting too long as "nearly balanced."
The remarks by Dudley, an influential advisor to Janet L Yellen, the Fed's chairwoman, reflected the tentative consensus among Fed officials that the time has come to raise the benchmark rate when the Federal Open Market Committee meets in Washington on December 15 and 16.
Investors and analysts now regard a December increase as all but certain, barring unexpected developments.
The Fed has held interest rates near zero since December 2008 to encourage risk-taking by investors and borrowing by businesses and consumers, in hopes of stimulating economic activity. Raising rates will begin to reduce that effect.
Indeed, as investors anticipate liftoff, borrowing costs already have started to rise. The average rate on a prime mortgage loan reached 3.98 per cent last week, according to Freddie Mac, the highest level since summer, when investors last expected the Fed to act.
The question now is when the Fed will raise rates for a second time, and a third.
The Fed says it plans to move slowly because the economy remains weak, a point that Dudley emphasised. Yellen has said she expects to raise rates by about one percentage point a year. But in the forecasts that Fed officials submitted in September, the predicted level of the benchmark rate at the end of 2016 ranged widely, from -0.1 per cent all the way up to 2.9 per cent.
Charles L Evans, president of the Federal Reserve Bank of Chicago, who has said in previous speeches he did not want to raise rates this year, said on Thursday that he was no longer focused primarily on the timing of the liftoff, but instead on pressing for rates to rise slowly. Evans said he expected it would be appropriate for rates to remain below 1 percent at the end of next year.
"It is critically important to me that when we first raise rates, the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases," Evans said. "If we do not, then market participants might construe an early liftoff as a signal that the committee is less inclined to provide the degree of accommodation that I think is appropriate for the timely achievement of our dual mandate objectives. I would view this as an important policy error."
Jeffrey M Lacker, president of the Federal Reserve Bank of Richmond, who has voted to raise interest rates at the last two meetings of the policy-making committee, said in an interview on Wednesday that he would prefer a pace "a little more rapid" than one percentage point a year.
Lacker said it was "too soon to tell" whether the Fed had waited so long to raise rates that it would now need to act even more quickly in order to control inflation.
"I think there's a chance we are behind the curve, but it will be a year or two before we figure that out," he said. "We have room to accelerate if we find out that we wish we'd started earlier."
Dudley's speech on Thursday was noteworthy because in recent months he had expressed misgivings about raising rates, noting in particular that the late summer volatility of financial markets might signal emerging weakness, particularly given the struggles of the global economy.
"The fundamentals supporting domestic demand look quite sturdy," Dudley said. "Also, the international outlook appears less problematic than it did just a few months ago."
Dudley noted that job growth rebounded in October, allaying concerns about a downward trend. The unemployment rate has fallen to 5 per cent, close to the level Fed officials regard as normal, and other measures, like part-time workers who want full-time jobs, also have declined.
In a speech Thursday evening, Stanley Fischer, the Fed's vice chairman, said the Fed's decision to delay liftoff in September was an appropriate response to the appreciation of the dollar, which weakened domestic growth. But he suggested there was no reason to keep waiting.
"While the dollar's appreciation and foreign weakness have been a sizable shock, the US economy appears to be weathering them reasonably well," he said. "Monetary policy has played a key role in achieving these outcomes through deferring liftoff relative to what was expected a little over a year ago."
Dudley, for his part, said he still viewed the decision to raise rates as a close call.
In particular, he noted that inflation remained weak, and he became the first senior Fed official to acknowledge a recent downturn in certain measures of inflation expectations.
Market-based measures have fallen sharply in recent years, a trend Dudley and other officials have played down, saying those measures reflect a variety of factors. But Dudley said on Thursday that survey-based measures, which the Fed has emphasised, were also slipping.
"There is some evidence that suggests that inflation expectations are under downward pressure," he said, although he hastened to add that the declines were "very modest in magnitude."
A strengthening of that downward trend would concern Fed officials because they view the stability of inflation expectations as one of the Fed's most important and valuable achievements.
"Avoiding a Japan-like experience, in which inflation expectations have become unanchored to the downside, should be an important consideration in the conduct of monetary policy," Dudley said.
He added, however, that if growth remained strong, he expects this problem, too, would go away.
©2015 The New York Times News Service