The time has come to begin raising interest rates, slowly, Federal Reserve Bank of St. Louis President James Bullard said Friday.
At a conference on the Fed’s monetary policy in New York City, Bullard said the Fed is making enough progress toward reaching its unemployment and inflation targets to begin raising short-term interest rates from zero, where it has held them since the financial crisis.
“The most prudent course of action is to begin to normalize the policy rate slowly and gradually,” Bullard said, according to prepared text.
Bullard noted that even after the highly anticipated first increase in the Fed’s target rate, interest rates still would be relatively low.
In fact, he said, raising interest rates would be a “relatively minor part” of the Fed’s move from stimulus to tightening, which started when it began slowing its large-scale purchases of government bonds in late 2013.
Marking the improvement in the economy since then by raising rates “suggests the best path forward for U.S. monetary policy,” he said.
Bullard is not currently a voter on the Fed’s monetary policy committee but will rotate into a voting role in January.
Bullard’s comments were as notable for what he did not say. He did not take note of falling bond market expectations for inflation, a development that has caused some members of the Fed to become concerned that the central bank might fall short of its 2 percent inflation target.
Last year, Bullard cited falling market expectations of inflation as a reason to delay the “taper” in the Fed’s bond purchase program.
But similar concerns do not appear to be on Bullard’s mind at the moment. During his speech, he discussed three possible justifications for delaying rate increases, each of which he dismissed and none of which involved falling market inflation expectations.
One scenario he considered was that the Fed should maintain loose monetary policy as long as inflation is below target. Another is that market real interest rates — that is, adjusted for inflation, would be lower than they are under the Fed’s current policy. A third was that global events, such as slowing growth in China, play a greater role driving the U.S. economy that commonly thought.
Members of the Fed declined to raise interest rates at their September meeting. Investors will be watching closely for signs that officials at the central bank are inclined to act at their October or December meetings. Fed Chairwoman Janet Yellen has said that a rate hike is still likely this year.
