Federal Reserve Bank of St. Louis President James Bullard predicted the central bank will raise interest rates starting in the first quarter of 2015, sooner than most of his colleagues think, as unemployment falls and inflation quickens.
Asked about his forecast for the timing of the first interest-rate increase since 2006, he said: “I’ve left mine at the end of the first quarter of next year.”
“The Fed is closer to its goal than many people appreciate,” Bullard said today in an interview with Fox Business Network. “We’re really pretty close to normal.”
The Federal Open Market Committee is debating how long to keep the benchmark interest 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.
U.S. stocks fell after a report showed consumer spending grew less than forecast and extended declines following Bullard’s comments. The Standard & Poor’s 500 Index slid 0.4 percent to 1,951.10 at 11:41 a.m. in New York. The 10-year Treasury yield fell four basis points, or 0.04 percentage point, to 2.52 percent.
Bullard predicted the jobless rate may fall below 6 percent and inflation rise near 2 percent by the end of this year.
If his forecasts bear out, “you’re basically going to be right at target on both dimensions possibly later this year,” Bullard said. “That’s shocking, and I don’t think markets, and I’m not sure policy makers, have really digested that that’s where we are.”
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. The forecasts, represented as dots on a chart, don’t give the quarter in which the first increase is expected to occur.
Economists surveyed by Bloomberg from June 6 to June 11 predicted a rate increase in the third quarter of next year, to 0.5 percent from the current range of zero to 0.25 percent.
At a press conference following last week’s meeting, Fed Chair Janet Yellen played down the significance of Fed officials’ interest-rate 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.