It’s time to get rid of the Federal Reserve’s promise to keep interest rates near zero, a Fed official said Friday in the wake of a monster jobs report.
Loretta Mester, the president of the Federal Reserve Bank of Cleveland and a voting member of the Fed’s monetary policy committee, said the central bank should remove the language from its policy announcements that it will keep interest rates near zero for a “considerable time.”
“I really believe that our communications need to be adjusted based on what we’ve seen in the economy,” Mester told Reuters in an interview. She called the “considerable time” phrase “really stale.”
With the Bureau of Labor Statistics’ report Friday morning that the U.S. economy added 321,000 jobs in November, there is mounting evidence that the labor market is headed toward full health.
In recent months, Chairwoman Janet Yellen and other Fed officials have said in their official communications that they would base their decision to raise rates on developments in employment and inflation. The Fed has held short-term interest rates near zero since the financial crisis in an effort to stimulate the economy.
While the unemployment rate has dropped during 2014, inflation has stopped moving up toward the Fed’s 2 percent target in recent months.
Mester, however, told Reuters that she expected inflation to pick up in coming months.
Investors appeared to interpret Friday’s jobs report as a sign that the Fed would move toward earlier rate increases. Markets priced in earlier rate hikes, with bond contracts implying that the Fed’s target rate would be near 1 percent by the end of 2015, up from closer to 0.5 percent yesterday.
A top Fed official said earlier in the week that continued job gains and rising inflation would prompt the Fed to accelerate its timeline for raising rates.
“If unemployment continues to decline, if the labor market continues to strengthen and if we see some signs of inflation beginning to increase, then the natural thing is to get the interest rate up,” Fed Vice Chairman Stanley Fischer said Tuesday at an event in Washington.
Raising rates would be a major step toward returning to normal policy for the Fed. Since 2008, it has engaged in massive purchases of bonds alongside its zero-interest rate policy to boost the economy. Its balance sheet has expanded from below $900 billion to $4.5 trillion during that time.
