Fed official warns of ‘over-hot’ economy, calls for a 1-point rate hike

An official at the Federal Reserve called Wednesday for the central bank to raise interest rates a full percentage point this year, setting a much bolder expectation for ending the Fed’s emergency stimulus measures than investors currently expect.

Federal Reserve Bank of Boston President Eric Rosengren also warned in a speech in Boston that it is “important to avoid creating an over-hot economy” through low interest rates.

To avoid generating too-high inflation or financial bubbles with low rates, Rosengren suggested, the Fed should plan on raising rates every other meeting this year, absent any big changes in the economy.

If the Fed followed Rosengren’s suggestion, the central bank’s target for short-term interest rates would stand at 1.75 percent to 2 percent by the end of the year, back to where it was in spring 2008, before the worst of the financial crisis struck.

It would be a major change for investors, resetting expectations for rates on commercial loans, mortgages, credit cards and much more.

Currently, markets see a rate target that high as an extremely unlikely scenario. Investors see the greatest odds of the target rising to about 1.25 percent by the end of the year.

Rosengren is not a voting member of the Fed’s monetary policy committee this year. His remarks, however, are likely to catch markets’ attention because of his track record as a “dove” — more concerned about unemployment, less worried about inflation rising too high. Over the past year or so, Rosengren has surprised Fed-watchers with his advocacy for higher rates.

Rosengren noted that he is seeing signs that tighter money is needed, such as businesses complaining about a shortage of workers at prevailing wages. He noted that he has been hearing about businesses in New England considering moving to Boston to get closer to the universities that can provide them with new potential hires.

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