Stronger American economic growth and returning inflation could prompt the Federal Reserve to raise interest rates within a year according to a regional Fed official.
St. Louis Federal Reserve President James Bullard told Bloomberg Radio that the first increase of the Fed Funds rate, which the bank has held at 0.25 percent for more than five years, could come in the first quarter of 2015.
This is similar to the schedule that Fed Chair Janet Yellen suggested in her press conference on March 19th when she noted that the period between the end of quantitative easing purchases by the central bank and the first rate hike might be six months.
The Fed has reduced its asset purchases by $10 billion at each of the last three FOMC meetings, leaving the bank buying $55 billion a month of MBS securities and Treasuries.
At that pace just $5 billion would remain after the October 29th meeting and purchases would end at the December 17th meeting. Six months after the October 2014 FOMC is the middle of April 2015, six months after the December meeting is June 2015.
Mr. Bullard has made similar statements in the past which is probably why there was little reaction in currencies or equities, though the euro did dip briefly to 1.3752, the day’s low after the news item.
On March 27th Mr. Bullard told Reuters Insider television that the Fed should start raising rates early next year with the aim of returning them to normal by the end of 2016.
"You have to keep in mind I tend to be a more optimistic member of the committee," he said. "I have a probably, a somewhat stronger forecast and a view about policy that suggests that maybe we should get up a bit faster than what some of the other members have."
Bullard said that the “normal" short-term rate target is 4.00 to 4.25 percent.
Historically that would place the rate on a par with the 4.37 percent average of the eighteen years from 1990 to the end of 2007.
Interest rates in general and the Fed Funds rate in particular have been falling since the early 1980s as inflation has ebbed worldwide.
In the 1980s the Fed Funds rate averaged 9.85 percent skewed higher by the 20 percent rates in 1980 and 1981 used by Fed Chairman Paul Volker to end the high inflation of the previous decade.
In the 1990s the Fed Funds rate averaged 5.12 percent and from 2000 to the end of 2007 the average was 3.44 percent. At the current rate of 0.25 percent the Fed has a long way to go before normal rates are achieved.
Mr. Bullard does not vote on Feed policy this year but does take part in policy discussions. He joins the FOMC as a voting member in 2016.
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