The U.S. central bank shouldn’t be hasty in dropping a pledge to keep interest rates low for a “considerable time” to avoid premature policy tightening, said Federal Reserve Bank of Atlanta President Dennis Lockhart.
“I am not in a rush to drop the ‘considerable time’ phrase if it would in any way convey an imminent liftoff decision,” he told reporters today after a speech in Atlanta. “I am comfortable with continuing with that language.”
The Federal Open Market Committee meets on Dec. 16-17 to consider how quickly it should raise rates, which have been held near zero since December 2008, amid signs of accelerating labor- market gains. A key part of the debate among officials next week is expected to be over this policy commitment.
The FOMC in October retained a vow to keep rates low for a “considerable time,” while also adding that rates will rise sooner if the economy does better and stay low if it doesn’t.
Fed Vice Chairman Stanley Fischer last week said that officials wouldn’t simply drop the commitment without replacing it with some other form of policy guidance.
Lockhart, an FOMC voter in 2015, said that recent economic evidence was encouraging, while also urging the Fed to exercise “patience” over the timing of the initial rate increase to avoid committing a policy error that would force it to backtrack.
“Reversing a start to interest-rate normalization, and subsequently having to go back to the quantitative easing well, would erode Fed credibility and confidence in the economy for the longer term,” he earlier told the Council for Quality Growth, a local business group. Lockhart said he expected the Fed to start raising rates in mid-2015 or later.
The case for keeping “considerable time” has weakened somewhat after data showed U.S. hiring surged in November, with the 321,000 advance in payrolls exceeding the most optimistic projection in a Bloomberg survey of economists. The jobless rate held at a six-year low of 5.8.
“It’s hard to avoid considering that a very strong report,” Lockhart told reporters. “I would caution these are just one month’s numbers. They are subject to revision. But the fact that the job gains were broad based, I find encouraging.”
On the other hand, the Fed is undershooting its 2 inflation goal. The central bank’s preferred gauge of price pressures rose by 1.4 in October versus the same month last year and hasn’t been above 2 since March 2012.
Lockhart said he expected price pressures to emerge, lifting inflation back up toward the target. If that expectation wasn’t met, Lockhart said it would impact his view on the correct timing for rate rises.
“If I am going to stay true to data-dependency, I’d have to consider at that time what are the options,” he said. “I don’t think liftoff therefore can be taken in those circumstances as carved in stone” if inflation is flat or falling.
The Fed said in October that if there is faster progress toward its employment and inflation goals than expected, rate increases were likely to occur sooner than anticipated. Officials also said that if progress was slower, increases probably won’t come until “later than currently anticipated.”