Federal Reserve presidents disagreed today on whether a decline in the U.S. unemployment rate to the lowest level in almost six years warrants advancing the timing for an interest-rate increase.
Philadelphia Fed President Charles Plosser said the Fed risks losing credibility by waiting too long to raise rates, and economic data are already suggesting a need to tighten policy. Chicago’s Charles Evans and Atlanta’s Dennis Lockhart countered that low inflation and labor-market slack will allow the central bank to wait until the second half of 2015 or 2016.
Plosser, speaking in a Bloomberg Television interview with Michael McKee in Jackson Hole, Wyoming, said “we are closer than a lot of people might think” to the first interest-rate increase since 2006. If the Fed waits too long, he said, “we’ll lose credibility. We may lose control of inflation.”
Fed officials are approaching their goals for full employment and price stability faster than they had forecast, sharpening the debate over the timing of a rate increase. St. Louis Fed President James Bullard warned this week that inflation will rise above the Fed’s target late next year.
“Monetary policy ought to be reacting to the data,” Plosser, 65, said. “We are on a path that says low for long and we have no plans to raise interest rates anytime soon, yet as the data keeps telling us, we ought to be raising rates.”
Unemployment fell to 6.1 percent in June, the lowest level in almost six years. Consumer-price inflation accelerated to 1.8 percent in May, according to the Fed’s preferred gauge, the biggest 12-month increase since October 2012 though still below the Fed’s 2 percent goal.
Lockhart cautioned against pulling the trigger too soon, arguing there is still not enough evidence the Fed is close to achieving its twin goals of maximum employment and price stability.
The Federal Open Market Committee “is still somewhat short of the point where achievement of the two objectives is confidently in sight,” he said in a panel discussion at the Sixth Annual Rocky Mountain Economic Summit in Jackson Hole.
“I don’t feel enough evidence has arrived to be sure price stability is here or near,” he said. Additionally, “we have been seeing very little upward wage pressure, and this tells me there remains considerable actual slack in employment markets.”
Evans also countered Plosser’s views on consumer prices. In a separate Bloomberg Television interview broadcast today, he said inflation is likely to stay below the Fed’s objective for a few years, and that low wage growth is one of “many signs of continued resource slack.”
“It could well be the case that it should be early 2016 before” the Fed raises the benchmark interest rate, he said.
In response to a question, Evans said that the rate of participation in the labor force “has come down very quickly and over some period of time,” with about a third of the reduction attributable to cyclical forces.
As an improving labor market draws some people back into the workforce, “we can expect the unemployment rate not to fall as quickly in coming quarters.”
Speaking to reporters after the panel, Lockhart said he sees “a shadow labor market in this country” made up of people available for work but ’’marginally attached’’ to the labor force.
“More encouraging employment conditions will attract some of these people back,” he said. Additionally, elevated levels of people working part time for economic reasons “will be absorbed as the economy strengthens,” he said.
Both Evans and Lockhart said that if economic growth is much stronger than they expect, they would reconsider their positions on the timing for raising interest rates.
“A much stronger economy” would be “a very good outcome” Evans said. He said he agreed with Lockhart’s forecast that the economy would grow at a rate of at least 3 percent for the next several quarters.
Plosser is a voting member of the FOMC this year; Evans and Lockhart are non-voters.
Plosser said he sees risks in waiting too long to raise the benchmark federal funds rate, which reflects the cost of overnight loans in the interbank market. The rate has been kept in a range of zero to 0.25 percent since December 2008.
“We may lose control in the financial markets where we find ourselves later on having to raise rates faster and higher than we otherwise would like to because we are so far behind that the markets get ahead of us,” he said. “That could be very disruptive.”
As the Fed normalizes policy, Lockhart said the interest rate on excess reserves will “play an important role” and the federal funds rate will “continue to be part of the mix.” The latter rate may be “communicated with perhaps a slightly different definition than in the past,” he said. Reverse repo transactions will play “a supporting role.”
Policy makers “have not yet come to final decisions on the mix of tools” and “operationally how we will actually execute,” he said.
He told reporters policy makers are “making very good progress” in planning the exit from record monetary stimulus, but that “should not be taken as that pulling the trigger is around the corner.”
Traders see about a 37 percent chance the Fed will increase its key rate by June 2015, little changed from the end of May, federal funds futures contracts show.
The 10-year Treasury yield fell two basis points, or 0.02 percentage point, to 2.52 percent as of 4:05 p.m. New York time, according to Bloomberg Bond Trader prices.
Most FOMC participants reiterated their view last month that the Fed will refrain from raising its benchmark rate until 2015. The median of 16 forecasts was for the rate to climb to 1.13 percent at the end of 2015 and 2.5 percent a year later.
(An earlier version of this story was corrected to show one third of decline in workforce participation due to cyclical forces)
To contact the reporter on this story: Steve Matthews in Atlanta at firstname.lastname@example.org
To contact the editors responsible for this story: Chris Wellisz at email@example.com Mark Rohner