Tags: Fed | US | Rate | Hike

Fed Official: US Almost Strong Enough for Rate Hike

Thursday, 03 Jun 2010 09:45 AM

The U.S. economy is almost strong enough to allow the Federal Reserve to begin thinking about raising interest rates, Atlanta Fed President Dennis Lockhart said on Thursday.

While he noted unemployment would likely remain elevated for some time, Lockhart said the U.S. central bank should not wait too long before beginning to tighten the reins.

"The time is approaching when it will be appropriate to consider recalibrating interest rate policy. I do not believe that time has yet arrived," Lockhart said in the prepared text of a speech in Atlanta.

"As the economy continues to improve and financial markets find firmer ground, extraordinarily low policy rates will not be needed to promote recovery and will become inconsistent with maintaining price stability."

In response to the most severe financial crisis in generations, the Fed not only slashed interest rates effectively to zero but also undertook a host of emergency measures such as buying up Treasury and mortgage bonds.

Lockhart's comments mark a significant change in tone for the regional Fed president, who has been among the most dovish on the central bank's policy in recent months.

They suggest firmer growth in the United States is catching the attention of Fed policymakers, despite the renewed risks to the outlook from the turmoil surrounding European debt markets.

"Consumer activity over the last few months has exceeded the expectations of analysts," said Lockhart, who is not a voting member this year on the Fed's policy-setting Federal Open Market Committee.

"Business investment in equipment and software has been surprisingly strong."

Indeed, U.S. gross domestic product has been rising since last summer, expanding 3.0 percent in the first quarter on an annualized basis.

Still, he warned the recovery would be uneven. In particular, weak employment growth would likely prevent rapid rises in incomes, restraining consumers' ability to spend.

In this context, Lockhart said inflation was not a major concern, pointing to a recent slowdown in consumer prices and broad stability in inflation expectations.

He said turbulence in Europe added to uncertainty in financial markets, but did not appear very concerned about the possibility of a spillover into the United States.

Lockhart sees the unemployment rate, which currently is hovering just below 10 percent, receding only gradually. But that does not mean official borrowing costs can stay near zero indefinitely.

"I'm very concerned about unemployment, and certainly employment trends should be a critical consideration in setting policy," he said. "But I accept that good policy, even in circumstances of unacceptable levels of unemployment, may incorporate higher interest rates."

This view moves him closer to Thomas Hoenig, president of the Kansas City Fed, who has been saying for months that the Fed's vow to keep interest rates low for an "extended period" might be counterproductive.

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The U.S. economy is almost strong enough to allow the Federal Reserve to begin thinking about raising interest rates, Atlanta Fed President Dennis Lockhart said on Thursday. While he noted unemployment would likely remain elevated for some time, Lockhart said the U.S....
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2010-45-03
Thursday, 03 Jun 2010 09:45 AM
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