Tags: US | Fed | Economy

Official: Fed May Raise Rates Before Jobs Return

Thursday, 01 Apr 2010 08:04 AM

Rock-bottom interest rates are still needed to aid the economic recovery, but there's a chance that the Federal Reserve may have to start raising rates before the nation's unemployment rate drops significantly, a Federal Reserve official said Wednesday.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said the Fed is right to pledge to keep rates at record lows for an "extended period." But he — as Federal Reserve Chairman Ben Bernanke did last week — said that doesn't mean a specific time period or number of meetings. Some analysts have taken it to mean around six months.

After suffering from the worst and longest recession since the 1930s, the economy seems to be on a path for moderate growth, a little below a 3 percent pace for the January-to-March quarter, Lockhart said in a speech to business people meeting in Hartford, Conn.

"It's quite possible the recovery could be well advanced before any significant reduction of unemployment materializes," Lockhart said.

"It's also quite possible circumstances justifying the start of a cycle of policy tightening will develop well before the unemployment rate has found a satisfactory level," he added.

The unemployment rate now stands at 9.7 percent. The Fed, along with many private economists, predict the jobless rate will stay high over the next two years because economic growth won't be robust enough to drive it down quickly.

Economists estimate that employers added around 190,000 jobs in March, in what they hope will be the start of consistent payroll gains. If they are right, it would mark the biggest jobs gain in three years and only the second month since the recession started in December 2007 that the economy actually added jobs.

The government releases its employment report on Friday. Analysts think the jobless rate will stay at 9.7 percent for the third straight month.

Looking ahead to Friday's report, Lockhart said, "All things considered, labor market trends appear to be headed in the right direction."

Lockhart indicated that the Fed shouldn't keep holding rates at low levels until the unemployment rate drops to where it was before the recession — around 4.5 percent, a rate that many analysts believe is better than normal. "Calibrating monetary stimulus to a goal of bringing unemployment fully to pre-recession levels would be a mistake," he said.

Many economists say it will take at least until the middle of this decade for the situation to get back to normal, meaning a jobless rate of 5.5 percent to 6 percent. It will also take years for the economy to recover the 8.4 million jobs wiped out by the recession, they say.

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Rock-bottom interest rates are still needed to aid the economicrecovery, but there's a chance that the Federal Reserve may have tostart raising rates before the nation's unemployment rate dropssignificantly, a Federal Reserve official said Wednesday.Dennis Lockhart,...

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