By Michael S. Derby
Federal Reserve officials sparred Friday over whether the
central bank is likely to move too soon or wait too long to raise
interest rates.
The presidents of the Minneapolis and Philadelphia regional Fed
banks both dissented for different reasons at the central bank's
policy meeting Wednesday, at which it signaled it is likely to
start lifting rates from near zero next year.
The Fed said in a statement after the meeting it could "be
patient" in deciding when to start raising rates. Fed Chairwoman
Janet Yellen, in a news conference after the meeting, said that
means the Fed likely won't move until after its next two meetings,
in January and March.
Minneapolis Fed President Narayana Kocherlakota suggested Friday
that the central bank is preparing to move too fast, saying in a
statement that its plans could cause inflation and expectations of
inflation to sink lower. Inflation has been running below the Fed's
2% target for more than two years.
Mr. Kocherlakota, who will step down in 2016 when his term ends,
said the Fed should commit to keeping interest rates very low until
the one-to-two-year expected inflation outlook is seen moving back
toward its target.
The Fed's "failure to respond to weak inflation runs the risk of
creating a harmful downward slide in inflation and longer-term
inflation expectations of the kind that we have seen in Japan and
Europe," he said.
Meanwhile, Philadelphia Fed leader Charles Plosser renewed his
criticism that the Fed may be behind the curve on raising rates,
saying in a statement that "waiting too long to initiate a gradual
increase in rates could result in the need for more aggressive
policy in the future, which could lead to unnecessary volatility
and instability."
Mr. Plosser, who has said he will step down in early 2015, said
he dissented over the pledge to "be patient" because it implies the
decision will be based on a time period rather than on the
evolution of the economy. "I am afraid the [Fed] is not leaving
itself the flexibility to respond to the data if we continue to see
an improving economy," he said.
Mr. Kocherlakota has been one of the strongest supporters of
aggressive Fed action to help spur the economy. Other officials
sympathetic to that view have slowly moved toward embracing the
idea of raising rates next year.
San Francisco Fed President John Williams, speaking Friday on
Bloomberg Radio, said the U.S. economy is in "a very good place
right now," and that next June "seems a reasonable starting point
for thinking about liftoff" of interest rates.
He said he expects inflation to be soft next year but continues
to believe a recovering job market and sustained growth will push
price increases back up to the desired level over time.
Mr. Williams, who gains a vote on the Fed's policy-setting
committee in 2015, said the central bank will likely have to look
through weak price gains next year, saying that so-called core
inflation--which excludes volatile food and energy prices--"will
likely be below 2% when liftoff is appropriate." He said if
inflation doesn't appear likely to rise, the Fed can either delay
rate increases or move more slowly with the overall pace of
boosting borrowing costs.
Consumer prices, by the Fed's preferred measure, were up 1.4% in
October from a year before and are forecast to weaken further in
the months ahead due to falling oil prices.