James Bullard, president of the Federal Reserve Bank of St. Louis, said the U.S. economy is improving enough to withstand an increase in short-term interest rates next year as growth picks up.
“I’m starting to think the economy could tolerate at least a little bit of the central bank getting back to a more normal stance,” Bullard, who favors raising the benchmark rate in the first quarter of 2015, said at an event today in New York.
The Federal Open Market Committee is closer to its goals for full employment and low and stable inflation than many investors realize, Bullard said. He predicted the pace of economic growth will accelerate to 3 percent this year after an unexpectedly deep first-quarter contraction.
“Inflation is picking up now. It is still below target but it has been moving up in recent months,” he said in response to a question at a forum organized by the Council on Foreign Relations. “I don’t think financial markets have internalized how close we are to our ultimate goals, and I don’t think the FOMC has internalized how close we are.”
The FOMC is debating how long to keep the benchmark federal funds rate near zero after completing a bond-purchase program that’s set to end late this year. The committee repeated on June 18 that it expects the rate to remain near zero for a “considerable time” after the purchases end.
Stocks declined after a report showed consumer spending rose less than forecast and Bullard told Fox Business Network that he favors raising rates in early 2015. The Standard & Poor’s 500 Index slid 0.1 percent to 1,957.22 at the close of trading in New York. The 10-year Treasury yield fell three basis points, or 0.03 percentage point, to 2.53 percent at 4:08 p.m.
Bullard, 53, urged investors to pay attention to Fed officials’ projections for borrowing costs.
“Investors should be listening to the committee,” Bullard said. “They are not. Of course you can do what you want. But the committee is giving as best it can its guidance based on all considerations, including how the economy will perform going forward.”
In quarterly forecasts released June 18, Fed officials said they expected the benchmark rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later, higher than they previously forecast.
Economists surveyed by Bloomberg from June 6 to June 11 predicted a rate increase in the third quarter of 2015, to 0.5 percent from the current range of zero to 0.25 percent.
Fed officials’ forecasts, represented as dots on a chart, don’t give the quarter in which the first increase is expected to occur.
At a press conference following last week’s FOMC meeting, Fed Chair Janet Yellen played down the significance of officials’ forecasts.
“Around each of those dots, I think every participant who’s filling out that questionnaire has a considerable band of uncertainty around their own individual forecast,” she said.
On the economy, Bullard said he expects inflation to exceed the Fed’s 2 percent goal next year.
The Fed’s preferred gauge for inflation was up 1.8 percent from a year earlier in May, the biggest 12-month increase since October 2012. It has been below 2 percent for two years.
To contact the editors responsible for this story: Chris Wellisz at email@example.com James L Tyson