• St. Louis Fed official says oil shock distorts price data
  • Bullard: 'prudence alone' suggests higher interest rates

Federal Reserve Bank of St. Louis President James Bullard said that the U.S. central bank should raise interest rates from near zero because emergency policies are not needed with the labor market and inflation near to the central bank’s goals.

“I have been an advocate of beginning to normalize the policy rate in the U.S.,” Bullard said in a speech in Washington on Thursday. “The U.S. economy is quite close to normal today based on an unemployment rate of 5 percent, which is essentially at the committee’s estimate of the long‐run rate, and inflation net of the 2014 oil price shock only slightly below the committee’s target.”

Fed Chair Janet Yellen told Congress last week that the U.S. economy was performing well and that a December rate hike is a “live possibility.” Investors raised the probabilities of a Fed rate hike in December after a Labor Department report Friday showed 271,000 jobs were added in October, and the jobless rate fell to 5 percent.

“Prudence alone suggests that, since the goals of policy have been met, we should be edging the policy rate and the balance sheet back toward more normal settings,” Bullard told the Cato Institutes’s annual monetary conference in prepared remarks.

While inflation remains near zero, Bullard cited a measure of prices that strips out the biggest changes, including the effect of plunging energy prices.

“A measure that tries to control for this effect, the Dallas Fed’s trimmed mean inflation rate, measured year‐over‐year, is currently running at 1.7 percent, just 30 basis points below the FOMC’s inflation target of 2 percent,” Bullard said. “By these measures, the committee’s goals have been met.”

The St. Louis Fed official said Group of Seven economies could be forced to keep interest rates near zero for longer than expected, adding ”Prudent policy making suggests that we should at least entertain this as a realistic possibility.”

Zero rates could prove to be less stimulative and inflation would remain below target, which could prompt policy makers to lower their inflation targets in such a scenario, he said.

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