Federal Reserve officials talked up recent data on the U.S. economy and said it reinforced the case for raising interest rates, though they stopped short of committing to liftoff at their next meeting on Dec. 15-16.
"I’m comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions," Atlanta Fed President Dennis Lockhart told a conference in New York on Wednesday. "Given my reading of current conditions and my outlook views, I believe it will soon be appropriate to begin a new policy phase."
Investors are betting that the central bank next month will lift rates for the first time since 2006 following a solid U.S. employment report Nov. 6, ending a seven-year period of holding the benchmark federal funds rate near zero.
Lockhart, a voting member of the policy-setting Federal Open Market Committee this year, was speaking on a panel at The Clearing House annual conference together with Cleveland’s Loretta Mester and New York Fed chief William Dudley.
Sign of confidence
Dudley, the only regional Fed bank chief with a permanent vote on the FOMC, said he was looking forward to the day when the central bank can raise rates and sought to assure the audience that the decision to tighten would be a sign of confidence in the U.S. economy.
"If we begin to raise interest rates, that’s a good thing. That’s not a bad thing," he said during a question-and-answer session after his opening remarks, which were on financial regulation. "That’s a sign that the economy is actually returning to health, the Federal Reserve is getting closer to achieving our dual mandate objectives of maximum sustainable employment and price stability."
The job market has been improving as the Fed looks to fulfill its goals, while price pressures have lagged. U.S. employers added 271,000 new jobs in October, the most this year, yet the committee’s preferred inflation gauge hasn’t touched its 2 percent goal since 2012.
In prepared remarks, Lockhart said he’ll be monitoring data over the next four weeks to see if the indicators change his view that the economy is on a "reasonably solid trajectory," with growth at a "moderate pace."
Employment conditions are "undeniably" much improved from a year ago, and the FOMC’S liftoff criterion of seeing further job market improvement "has been met," he said. Asked later about inflation, Lockhart said there are transitory factors holding down prices and he’s prepared to "take that leap of faith that the economic forces are going to assert themselves in time."
Dudley said that liftoff won’t come as any surprise to investors when it happens, though he did not rule out some market response when the Fed decides to move.
"The good news is that this is probably the most well advertised, discussed, thought about, mused-over prospect of beginning a normalization of monetary policy in history," he said. "I’m not looking for a big reaction."
Officials made an explicit reference to the December meeting in their Oct. 28 FOMC statement, and Chair Janet Yellen told Congress on Nov. 4 that liftoff in December was a "live possibility." A majority of economists polled by Bloomberg News Nov. 6-12 saw an increase coming next month.
Mester, who votes on the FOMC next year, repeated her view during the panel discussion in New York that the U.S. economy could handle a 0.25 percentage point increase in interest rates.
Richmond Fed President Jeffrey Lacker, who votes this year and dissented in September and October in favor of a rate rise, told CNBC in an interview that strong growth in consumer spending showed the economy needed higher real interest rates.
"There’s a chance we’re going to get behind the curve" if the Fed delays liftoff, he said.