Rate hike: Question now is when Fed will raise it further

NEW YORK • Federal Reserve officials, poised to start raising the central bank's benchmark interest rate next month, are turning from the question of whether to act to how quickly to raise rates thereafter.

Mr William C. Dudley, president of the Federal Reserve Bank of New York, and the first senior Fed policymaker to signal in late August that the Fed was not quite ready to raise rates, said on Thursday that his reasons for hesitation have receded.

Now, he said, he sees a stronger case for moving ahead. "I think it is quite possible that the conditions the committee has established to begin to normalise monetary policy could soon be satisfied," he told the Economic Club of New York.

He said he saw the risks of acting too soon and waiting too long as "nearly balanced".

The remarks by Mr Dudley, an influential adviser to Fed chair Janet Yellen, reflected the tentative consensus among Fed officials that the time has come to raise the benchmark rate when the Federal Open Market Committee (FOMC) meets in Washington on Dec 15 and 16.

Investors and analysts now regard an increase next month as all but certain.

The Fed has held interest rates near zero since December 2008 to encourage risk-taking by investors and borrowing by businesses and consumers.

Raising rates will begin to reduce that effect. Indeed, as investors anticipate lift-off, borrowing costs have already started to rise.

The question now is when the Fed will raise rates for a second time, and a third.

The Fed says that it plans to move slowly because the economy remains weak, a point that Mr Dudley emphasised.

Dr Yellen has said she expects to raise rates by about 1 percentage point a year.

Mr Charles L. Evans, president of the Federal Reserve Bank of Chicago, who has said in previous speeches he did not want to raise rates this year, said on Thursday that he was no longer focused primarily on the timing of the lift-off, but instead on pressing for rates to rise slowly.

Mr Evans said he expected it would be appropriate for rates to remain below 1 per cent at the end of next year. "It is critically important to me that when we first raise rates, the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases."

Mr Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, who has voted to raise interest rates at the past two meetings of the policymaking committee, said in an interview on Wednesday that he would prefer a pace "a little more rapid" than 1 percentage point a year.

Mr Dudley's speech on Thursday was noteworthy because in recent months he had expressed misgivings about raising rates. This time, however, he said: "The fundamentals supporting domestic demand look quite sturdy.

"Also, the international outlook appears less problematic than it did just a few months ago."

NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on November 14, 2015, with the headline 'Rate hike: Question now is when Fed will raise it further'. Print Edition | Subscribe