Fed Officials Make Case for 2015 Liftoff After September Hold

Posen Calls for February Fed Rate Hike

Three Federal Reserve policy makers argued on Saturday for lifting the central bank’s key interest rate before year-end, countering bets by many traders that the Fed will wait until 2016.

Laying out their rationale for a rate increase at one of the Fed’s two remaining meetings of 2015, the central bankers cited continued improvement in the domestic economy, including low unemployment, which they suggested overshadowed concerns about global conditions and volatile financial markets.

San Francisco Federal Reserve Bank President John Williams, St. Louis Fed President James Bullard and Richmond Fed President Jeffrey Lacker each spoke or wrote on Saturday, days after the policy-setting Federal Open Market Committee voted on Thursday to leave rates unchanged.

The central bank’s decision, and the way its deliberations were framed, were interpreted by many Fed watchers as a sign that the central bank might not raise rates this year. In holding rates steady, the Fed noted international uncertainties and subdued inflation.

“It was a close call in my mind, in part reflecting the conflicting signals we’re getting,” Williams said of the decision during a speech in Armonk, New York. “I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year.”

According to Fed meeting materials, 13 of 17 policy makers still expect rates to increase in 2015. The Committee gathers next on Oct. 27-28 and again Dec. 15-16. The Fed’s policy interest rate has been near zero since 2008.

Despite the FOMC projection for a rate increase this year, traders now say it’s more likely than not that the Fed will postpone liftoff until 2016, based on the current pricing of federal funds futures contracts.

‘Argued Against’

While Williams voted to leave rates near zero, Bullard, who does not vote on policy until next year, argued in favor of a rate increase at the meeting, he said Saturday during a speech in Nashville, Tennessee.

“I argued against the decision,” Bullard said. Holding rates steady yet again seems to have “created rather than reduced global macroeconomic uncertainty,” he said.

The FOMC’s goals have “essentially been met, but the Committee’s policy settings remain stuck in emergency mode,” Bullard said.

The Fed’s twin objectives for its monetary policy are to achieve maximum employment and stable inflation, which it targets at 2 percent. The unemployment rate dipped to 5.1 percent in August. Williams said he expects the U.S. to reach full employment by the end of this year or early in 2016. By contrast, inflation remains subdued, with the Fed’s preferred indicator at just 0.3 percent.

Upward Pressure

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the committee said in its post-meeting statement.

Even with a small interest rate increase, policy will remain highly accommodative and continue to place upward pressure on inflation, Bullard said Saturday. Williams said that while a strong dollar and the fall in oil prices over the past year have tamped down price pressures, those factors “should prove transitory.” He expects that inflation will move toward 2 percent in the next two years.

Lacker, an anti-inflation hawk, dissented in favor of higher interest rates on Thursday. He said Saturday that the Fed’s failure to tighten had raised the risk of “adverse outcomes.”

“An increase in our interest rate target is needed, given current economic conditions and the medium-term outlook,” Lacker said in a statement posted on his regional bank’s website. Lacker was the sole dissenter to the Fed’s decision.

‘Close Call’

Both Williams and Bullard said October is a possibility for an interest rate increase, even though there will be relatively limited economic data -- including one jobs report and one Consumer Price Index reading -- between now and then.

“There is not a lot of data,” Bullard said in a question and answer session with reporters. “On the other hand, it was a close call at this meeting.” The Fed is “ready to go” in October if conditions warrant, he said.

Although traders are leaning against a Fed move for now, if markets don’t properly anticipate a rate increase when it arrives, “that doesn’t bother me,” Williams told reporters.

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