Fed official says bank shouldn’t wait too long to raise rates

by MPA06 Nov 2014
A top Federal Reserve official has warned that the central bank cannot wait until the economy reaches its targets to then raise interest rates.

Dallas Federal Reserve Bank President Richard Fisher said lower interest costs benefit the government in the near term, but its future net revenues become more sensitive to future rate increases. “Government finance problems are reduced today, at a cost of potential future problems.” Fisher said in New York City on Monday. “The larger bank reserves become, the greater is the government’s future interest-rate exposure.”

In a Bloomberg Television interview yesterday, Fisher added, “I would be very careful about waiting until we've already achieved our targets and then trying to rein in by raising interest rates, because every time this has been done in the history of the Fed, to my knowledge, then we've forced a recession.”

Last month, the Department of Labor reported the unemployment rate in September drop to 5.9%, closer to the Fed's goal of an unemployment rate between 5.2% and 5.5%. During the last two years, inflation has been well below the central bank’s target of 2%. Unemployment numbers for October are expected to be announced tomorrow.

Although the Fed does not have a target for wage growth, Fisher said Monday some commentators point to subdued wage growth has a reliable indicator of labor-market slack during the last five years. However, he said wage growth acts to slack with a lag and will continue to increase even after the policy stimulus is removed.

“If we keep pushing on the accelerator pedal until wage growth matches the rate that we believe to be sustainable, we will likely have pushed too far and missed our exit,” he said. “Wage growth rises at an increasing rate the farther the unemployment rate declines, the overshoot is likely to be large.”
 
Earlier this year, John Williams, president of the San Francisco Fed, predicted that inflation and employment will reach their targets by 2016 and suggested that rates must start rising mid-2015. "If I wait until mid-2016 (to raise rates) there is the danger that our economy could significantly overshoot and create undesirable inflation," he previously told a group of reporters.

Click here to read Fisher’s entire prepared remarks.
 

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