Two Fed officials stress gradual approach to raising US interest rates

A man walks past the Federal Reserve Bank in Washington, DC, US on Dec 16, 2015.
A man walks past the Federal Reserve Bank in Washington, DC, US on Dec 16, 2015.PHOTO: REUTERS

ATLANTA (BLOOMBERG) - The US central bank's gradual approach to raising interest rates remains appropriate, according to two regional Federal Reserve presidents who both expected inflation to continue to rise while the jobless rate achieved full employment.

"The economy today is well positioned for moderate growth and steadily improving conditions," Atlanta Fed chief Dennis Lockhart said on Monday (Jan 9) in the text of his prepared remarks. "It's less certain that the economy is positioned for a breakout to markedly higher growth on a sustained basis."

US central bankers are weighing how quickly to raise interest rates this year amid investor optimism that President-elect Donald Trump can shake the economy out of its low-growth rut by delivering tax cuts, investment and regulatory reforms that also lift price pressures.

Lockhart said he hadn't included the effects of those plans in his estimates of growth because it was too soon to make a judgment without more details on what the Trump team will propose, adding that "I continue to expect a gradual pace of interest rate increases."

Minutes of the Fed policy meeting last month showed officials were shifting their focus toward the risk that expansionary fiscal policy from the Trump administration may warrant a faster pace of rate hikes than expected. Their quarterly forecast also signaled three rate increases in 2017, according to the median estimate, compared to two in September.

Boston Fed President Eric Rosengren, who dissented last year in favor of raising rates, said he thought the median forecast "seems reasonable" provided the economy grew faster than it's so-called "potential" rate, which policy makers estimate is around 1.8 per cent in the longer run, according to their December projections.

This would help the Fed achieve its dual goals for 2 per cent inflation and maximum sustainable employment by the end of 2017 "and as a result, I believe that a still gradual but somewhat more regular increase in the federal funds rate will be warranted," he told an audience in Hartford, Connecticut earlier on Monday.

"Monetary policy will need to normalize more quickly than over the past year, but certainly not as rapidly as in the last tightening cycle, which began in 2004," he said.

That referred to the tightening campaign begun under former Fed Chairman Alan Greenspan, when the benchmark rate was raised a quarter-point for 17 consecutive meetings of the Federal Open Market Committee. In contrast, the FOMC has so far raised rates just twice in this cycle, with a quarter point move last month following a similar-sized move in December 2015.