Fed’s Williams sees strong case for December interest-rate hike

Under the type of policy rule envisioned by lawmakers, the Fed would commit to moving interest rates up or down depending on the readings of economic indicators like the jobless rate and inflation.

The natural interest rate is the rate at which an economy can maintain full employment and stable inflation; central banks traditionally lower rates to stimulate their economies, but have less room to do so when the natural rate is low.

Williams has been an FOMC voting member in 2015.

Key questions facing the FOMC-on global uncertainty, USA financial conditions, labor markets, inflation and the dollar-were discussed by President James Bullard during an event in Fort Smith, Ark.

Bullard also said on Friday the persistence of low real interest rates was “a puzzle”, echoing comments he made last week where he entertained the possibility the United States is entering an era of permanently low rates, which he termed “permazero”.

Regarding financial conditions in the USA, Bullard noted that while the China scare drove up US financial market volatility in August and September, this volatility has since abated.

The minutes of the latest Federal Reserve meeting released on Wednesday reinforced the rate hike view, providing broad, long-term support for the dollar.

The Fed is widely seen increasing its benchmark overnight interest rate at its December 15-16 policy meeting, with the debate already shifting to the pace of rate hikes going forward.

Bullard said the best guide to the FOMC’s pace of tightening will be the quarterly forecasts submitted by participants. But of course if we were to move, we would need to verify over time that expectation was being realized, and if not, adjust policy appropriately, ” she said.

Policymakers, including Fed chair Janet Yellen, have said that rate increases will be gradual and data-dependent.

Overall, “U.S. labor markets have largely normalized”, Bullard said.

However, permits for new construction, which are a closely-followed gauge of future demand, rebounded 4.1% to an annual rate of 1.15m, while permits for single-family homes rose 2.4% to 711,000, the highest level since the end of 2007.

While headline inflation measured from one year ago is very low, Bullard pointed out that this is due in part to the large drop in oil prices that began in mid-2014.

Next week will have less trading activity than usual as there are less releases on the economic calendar with holidays in Japan and the USA, reducing liquidity in the markets.

He then explained that since “foreign exchange markets are forward-looking and foresee most or all systematic movements in economies, including predictable policy movements”, only unexpected developments could cause further sharp movements. “The outlook on the dollar has not really changed”, Serebriakov said.