Fed will want more uncertainty on rates after hike – Bullard

Subsequent statements from Fed members, a strong non-farm payrolls and soft retail sales and inflation have paved the way forward to the first USA benchmark interest rate hike in 10 years. Most economists in a Bloomberg survey, and traders of federal funds futures, expect lift-off from near-zero, where the bank’s key lending rate has been since 2008, at that meeting.

“We are going to return to an era where there is a bit more uncertainty about what the committee is going to do, meeting to meeting”, he said to reporters after a speech in Fort Smith on Friday.

Currently, the Fed’s near-zero interest rate policy, along with its massive balance sheet, are pushing down on long-term rates and reducing the gap between short-term and long-term rates, John Williams said at a conference at University of California Berkeley’s Clausen Center.

The U.S. Labor Department reported a rebound in hiring last month, after weak readings in August and September.

Williams also said that he sees signs of core inflation “having stabilised”, and that it may even be starting to firm up.

The Fed still has a number of data points before its mid-December meeting, including the November jobs report. But he emphasized the Fed’s decisions will be based on data and won’t follow a predetermined path.

“You could think about keeping a permanently higher balance sheet, lowering the term premium and therefore actually raising the natural rate of interest in the economy”, Williams said.

A few feel it could lead to another recession, but Bullard provided data that suggested the economy is actually headed for another “boom period”.

“I do think the slope is the most important thing to communicate, the pace of increases”, he said, adding that the Fed’s quarterly economic forecasts will be critical in that regard, along with public comments from Fed officials and possible changes to the Fed’s post-meeting statement. He added, “We need to think more about whether going to negative interest rates gives us more room”.

Mr. Williams and Thomas Laubach, director of the Fed’s monetary affairs division, recently argued in a research paper that the natural interest rate, the real short-term interest rate consistent with the economy’s full potential, ” fell sharply and shows no sign of recovering” since the financial crisis. “I do worry because of the episode of the mid-2000s of locking ourselves in, just because we did something two or three times in a certain way”.

Minutes of the October discussions released Wednesday revealed Fed officials’ view that the job market would improve further and that inflation would begin to move toward their 2 percent annual target.