Fed’s Mester, Bullard Say U.S. Outlook Justifies Rate Hike

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Two regional Federal Reserve presidents who will vote on policy next year said that while they are mindful of market volatility, they consider the U.S. economy strong enough to justify raising interest rates.

“Inflation expectations have been relatively stable, we have growth, above-trend growth, we have labor-market improvements continuing,” the Cleveland Fed’s Loretta Mester told Bloomberg Television Friday at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming. “My view so far in looking at all of the factors is that the economy can sustain an increase in interest rates.”

St. Louis Fed President James Bullard said in a separate interview that market volatility shouldn’t affect the policy-making Federal Open Market Committee’s forecast for the economy. Neither Bullard nor Mester expressed a preference for raising rates at a specific meeting.

“The key question for the committee is -- how much would you want to change the outlook based on the volatility that we’ve seen over the last 10 days, and I think the answer to that is going to be: not very much,” Bullard said.

“You’ve really got the same trajectory that the committee will be looking at that we were looking at before, so why would we change strategy, which was basically to lift off at some point,” said Bullard.

Their remarks came two days after New York Fed President William C. Dudley said market turbulence made the case for a September liftoff “less compelling to me than it was a few weeks ago.”

Fed officials are weighing when to begin raising interest rates for the first time since 2006. While the U.S. is growing at a solid clip, inflation has been below the Fed’s 2 percent target for more than three years. The global outlook has been dimmed by a Chinese slowdown that is driving down commodity prices and spurring market turbulence.

Liftoff Timing

Bullard and Mester joined Dudley in leaving open the possibility that market volatility could influence when the Fed decides to start raising rates.

“I’m in the mode now of looking at all of the data,” Mester said, “including what’s going on in the volatility in financial markets.”

Bullard, in off-camera remarks to reporters following his televised interview, said that if market turmoil persists, that could affect the timing of the first rate increase.

“The committee does not like to move when there’s volatility,” he said. “If we had the meeting this week, people would probably say let’s wait.”

He added, “but the meeting is not this week, it’s Sept. 16 and 17.” Bullard also said he would support scheduling a press conference following the Oct. 27-28 FOMC meeting if the committee doesn’t raise rates next month. That would make it easier for the Fed to explain a liftoff in October.

2016 Voters

Bullard and Mester, along with Boston’s Eric Rosengren and Kansas City’s Esther George, will move into four rotating voting seats next year reserved for regional Fed presidents on the FOMC. Their views during the 2016 policy debate could help to determine how quickly interest rate increases proceed. If the Fed doesn’t raise rates this year, they could also directly influence the timing of liftoff.

George, speaking on Bloomberg Television in an interview aired Thursday, said she’s waiting to see how market volatility shapes up between now and the September meeting before reassessing her view that an interest rate hike is overdue.

Market volatility and the slowdown in China have prompted many investors and economists who expected a September rate hike to push back their projections.

Stocks Whipsawed

Equities around the world have been whipsawed this week, indicating markets remain subject to sudden shifts in investor sentiment. The Standard & Poor’s 500 Index fell 0.1 percent as of 11:14 a.m. in New York Friday after the U.S. stock benchmark’s biggest two-day gain since the beginning of the bull market in 2009. The yield on 10-year Treasuries was 2.16 percent compared with 2.18 percent late Thursday.

Mester said she is looking beyond disinflationary forces, including “oil price shocks, commodity prices and the appreciation of the dollar” and sees the economy on a path that will bring inflation up to the Fed’s 2 percent target.

“Because the economy is doing better and growth is above-trend, I’m reasonably confident that we’re going to get back to 2 percent,” she said.

Minneapolis Fed President Narayana Kocherlakota said policy makers should hold off tightening for the rest of this year to underscore their determination to bring inflation up to their 2 percent target.

“It’s not automatic that we get back to 2 percent,” Kocherlakota told Bloomberg Television. “Moves the Fed makes, the decisions we make, influence the credibility of where we’re going to go in the long run.”

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