Tapering is near as Fed ponders rate hike: Bank officials

NEW YORK • Key Federal Reserve officials said on Monday the US economy is growing rapidly and while the labour market still has room for improvement, inflation is already at a level that could satisfy one leg of a key test for the beginning of interest rate hikes.

Atlanta Federal Reserve Bank president Raphael Bostic said he is eyeing the fourth quarter for the start of a bond purchase taper, but is open to an even earlier start if the job market keeps up its recent torrid pace of improvement.

Moreover, he and Richmond Fed president Tom Barkin both said they believe inflation has already achieved the Fed's 2 per cent threshold, according to their separate assessments. That is one of two criteria to be met before rate hikes can be considered.

Their remarks are a sign that as Fed officials hold talks about how and when to taper asset purchases, they are also getting more detailed in their debate about what it will take to satisfy the Fed's inflation target under the new framework.

Dr Bostic, who has already pencilled in late next year for the start of rate hikes, pointed to the five-year annual average for the core personal consumption expenditures index, which by his calculation reached 2 per cent in May.

"There are many reasons to think that we may be at that goal target right now," Dr Bostic said, adding that the committee has yet to agree on the metrics to measure that progress, something policymakers will need to discuss.

Mr Barkin said high inflation seen this year may have satisfied one of the Fed's benchmarks for raising rates, though there is still room for the job market to heal before rates should rise.

Under the Fed's current policy guidance, rates will rise "when inflation hits 2 per cent, which I think you can argue it already has, and it looks like it is going to sustain there", said Mr Barkin.

Under the framework unveiled last year, Fed officials agreed to leave rates at near-zero levels until the labour market reaches maximum employment, and inflation averages 2 per cent, on track to moderately exceed 2 per cent for some time.

Boston Fed president Eric Rosengren said the goal of "substantial further progress" had been met for inflation, but that more improvement was needed in the labour market.

He said the tapering standard for employment could potentially be met by next month.

REUTERS