The Federal Reserve may have to raise rates more quickly than planned as unemployment falls and inflation quickens, said James Bullard, president of the St. Louis Fed.
“If macroeconomic conditions continue to improve at the current pace, the normalization process may need to begin sooner rather than later,” Bullard said in a speech today in Owensboro, Kentucky. He doesn’t vote on monetary policy this year.
Chair Janet Yellen told lawmakers yesterday the Fed plans to press on with record easing to combat persistent weakness in the job market. Speaking in semi-annual testimony, she repeated that the central bank will probably keep interest rates low for a “considerable period” after ending monthly bond purchases, which she said may be announced at an October policy meeting.
Fed officials are nearing their goals for full employment and price stability faster than they had forecast, sharpening the debate over the timing for the first rate increase since 2006. Bullard last week said a rapid drop in unemployment may push inflation “well above” the Fed’s target. He predicted price gains as high 2.4 percent by the end of 2015.
Bullard said to reporters after the speech he believes the Fed should raise the benchmark interest rate at the end of the first quarter 2015, adding that his view may change depending on economic data.
“I want to make sure there’s a bounce-back in the second quarter and that things look like they are on track to grow at 3 percent or better in the second half of the year, which is what I am expecting,” Bullard said.
The Fed will use the federal funds rate, the interest rate on excess reserves and the reverse repo rate while restoring a more normal approach to monetary policy, Bullard said.
“You are really talking about three rates that are going to work in tandem,” he said. “And they are going to move together,” signaling “the policy stance.”
The central bank, seeking to fuel growth and bring down unemployment, has held the main interest rate near zero since December 2008.
“Normalization will take a long time, and current policy settings are far from normal, suggesting an earlier start” to tightening, Bullard said in his speech to the Greater Owensboro Chamber of Commerce.
“Relatively low inflation and relatively weak labor markets have up to now suggested a later start,” he said. “Stronger-than-expected data, rising inflation and rapidly improving labor markets may change this calculus in the months and quarters ahead.”
Bullard, 53, said the Fed could raise interest rates without causing turmoil in financial markets.
“I have worried some about this issue,” he said in response to a question from the audience. “If we withdraw and normalize in a way reacting to data, interest rates will rise but will rise in a way that makes sense,” he said. “I do think we can do this in a way that will maintain relative stability in the bond market.”
Treasuries increased and stocks declined as demand for haven assets rose amid reports of escalating tensions in Ukraine and the Middle East. The benchmark 10-year note yield fell seven basis points to 2.45 percent in New York, while the Standard & Poor’s 500 Index declined 1.2 percent to 1,958.12.
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.
“The FOMC is closer to its macroeconomic targets today than it has been most of the time since 1960,” Bullard said, referring to the Federal Open Market Committee.
Bullard’s views last year swayed investors, with his speeches and interviews influencing the yield on the 10-year Treasury note more than any other Fed official, including then-Chairman Ben S. Bernanke, according to an analysis by Macroeconomic Advisers LLC, a research firm co-founded by former Fed Governor Laurence Meyer.
Bullard has been seen as a bellwether because his views have sometimes foreshadowed policy changes. He published a paper in 2010 entitled “Seven Faces of the Peril,” which called on the central bank to avert deflation by purchasing Treasury notes. That was followed by a second round of bond buying.