Fed members argue for rate hike this year

NEW YORK — Three Federal Reserve policy-makers argued on Saturday for lifting the central bank’s key interest rate before the end of the year, countering bets by many traders that the Fed will wait until next year.

Laying out their rationale for a rate increase at one of the Fed’s two remaining meetings this year, the central bankers cited continued improvement in the domestic economy, including low unemployment, which they suggested overshadowed concerns about global conditions and volatile financial markets.

San Francisco Federal Reserve Bank president John Williams, St Louis Fed president James Bullard and Richmond Fed president Jeffrey Lacker each spoke or wrote on Saturday, days after the policy-setting Federal Open Market Committee (FOMC) voted on Thursday to leave rates unchanged.

The central bank’s decision, and the way its deliberations were framed, were interpreted by many Fed watchers as a sign that the central bank might not raise rates this year. In holding rates steady, the Fed noted international uncertainties and subdued inflation.

“It was a close call in my mind, in part reflecting the conflicting signals we’re getting,” Mr Williams said of the decision during a speech in Armonk, New York.

“I view the next appropriate step as gradually raising interest rates, most likely starting some time later this year.”

According to Fed meeting materials, 13 of 17 policy makers still expect rates to increase this year. The FOMC gathers next on Oct 27-28, and again on Dec 15-16. The Fed’s policy interest rate has been near zero since 2008.

Despite the FOMC projection for a rate increase this year, traders now say it is more likely than not that the Fed will postpone liftoff until next year, based on the current pricing of federal funds futures contracts.

While Mr Williams had voted to leave rates near zero, Mr Bullard, who does not vote on policy until next year, argued in favour of a rate increase at the meeting, he said on Saturday during a speech delivered in Nashville, Tennessee.

“I argued against the decision,” Mr Bullard said. Holding rates steady yet again seems to have “created rather than reduced global macroeconomic uncertainty”, he said.

The FOMC’s goals have “essentially been met, but the committee’s policy settings remain stuck in emergency mode”, Mr Bullard said.

The Fed’s twin objectives for its monetary policy are to achieve maximum employment and stable inflation, which it targets at 2 per cent. The unemployment rate dipped to 5.1 per cent in August. Mr Williams said he expects the US to reach full employment by the end of this year or early next year. By contrast, inflation remains subdued, with the Fed’s preferred indicator at just 0.3 per cent.

Even with a small interest rate increase, policy will remain highly accommodative and continue to place upward pressure on inflation, Mr Bullard said Saturday.

Mr Williams said that while a strong dollar and the fall in oil prices over the past year have tamped down price pressures, those factors “should prove transitory.” He expects that inflation will move towards 2 per cent over two years.

Both Mr Williams and Mr Bullard said that October would be a possibility for an interest rate increase, even though there would be relatively limited economic data — including one jobs report and one Consumer Price Index reading — between now and then.

Although traders are leaning against a Fed move for now, if markets do not properly anticipate a rate increase when it arrives, “that doesn’t bother me,” Mr Williams told reporters. BLOOMBERG