Fed officials lay case for December liftoff

Thu Nov 12, 2015 7:17pm EST
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By Howard Schneider and Rodrigo Campos

WASHINGTON/NEW YORK (Reuters) - U.S. Federal Reserve officials lined up behind a likely December interest rate hike with one key central banker saying the risk of waiting too long was now roughly in balance with the risk of moving too soon to normalize rates after seven years near zero.

Other Fed policymakers argued that inflation should rebound, allowing the Fed to soon lift rates from near zero though probably proceed gradually after that.

In New York, William Dudley said: "I see the risks right now of moving too quickly versus moving too slowly as nearly balanced."

Dudley, who as president of the New York Fed has a permanent vote on the Fed's policy-setting committee, said the decision still required the central bank to "think carefully" because of the risk that the United States is facing chronically slower growth and low inflation that would justify continued low rates.

But his assessment of "nearly balanced" risks represents a subtle shift in the thinking of a Fed member who has been hesitant to commit to a rate hike, but now sees evidence accumulating in favor of one. For much of Janet Yellen's tenure as Fed chair, policymakers at the core of the committee, and Yellen herself, have said they would rather delay a rate hike and battle inflation than hike too soon and brake the recovery.

But Dudley said the current 5 percent unemployment rate "could fall to an unsustainably low level" that threatens inflation, while seven years of near-zero rates "may be distorting financial markets."

"I don't favor waiting until I sort of see the whites in inflation's eyes," he said about monetary policy timing. Going sooner and more slowly, he said at the Economic Club of New York, may now be best for the Fed's "risk management."

In Washington, Fed Vice Chair Stanley Fischer said inflation should rebound next year to about 1.5 percent, from 1.3 percent now, as pressures related to the strong dollar and low energy prices fade.   Continued...

William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, attends the Economic Club of New York Leadership Excellence Award in New York April 21, 2015. REUTERS/Eduardo Munoz