An influential monetary policymaker said this week that it would be appropriate for the Federal Reserve to raise the federal funds target rate later this year despite declining to do so in the September meeting of the Federal Open Market Committee (FOMC).
San Francisco Fed President and CEO John C. Williams said in an address to a symposium on China and U.S. financial systems in Armonk, New York, that he believes a rate hike would be appropriate for 2015. Williams presented cases both for and against raising rates in his speech, saying that economic turmoil overseas and low inflation made the case for the patient approach to raising rates.
“In the past, I have found the arguments for greater patience to clearly outweigh those for raising rates," Williams said. "The labor market was still far from full strength and the risk to the recovery’s momentum was very real. As the economy closed in on full employment, the other side of the ledger started gaining greater weight and the arguments have moved into closer balance."
When presenting the case for raising rates, Williams turned to the insight of Milton Friedman, who once won the Nobel Prize in Economics, who pointed out the long and variable lags of monetary policy.
"I use a car analogy to illustrate it," Williams said. "If you’re headed toward a red light, you take your foot off the gas so you can get ready to stop. If you don’t, you’re going to wind up slamming on the brakes and very possibly skidding into the intersection. In addition, an earlier start to raising rates would allow us to engineer a smoother, more gradual process of policy normalization. That would give us space to fine-tune our responses to react to economic conditions; raising rates too late would force us into the position of a steep and abrupt hike, which doesn’t leave much room for maneuver. Not to mention, it could roil financial markets and slow the economy."
"In addition, an earlier start to raising rates would allow us to engineer a smoother, more gradual process of policy normalization."
Williams said that given the progress the Fed continues to make on its goals, he views a gradual raising of the rates as the next "appropriate step," starting later in 2015. He is not the only one who believes that a rate hike will occur before the end of the year, however.
"While the policy normalization process didn’t begin with this meeting, absent any major setback, liftoff is highly likely before the end of the year," said Robert Denk, Assistant VP for Forecasting and Analysis at the National Association of Home Builders (NAHB). "The economic projection materials, and (Fed Chair Janet) Yellen in her comments, indicated that 13 of 17 FOMC members still anticipate the first rate increase before the end of the year. The 'dot plots' show seven of those members expect a 25 basis point increase by year-end, five expect a 50 point increase, and one 75 point increase."
Because of the potential rate increase later in the year, those who are considering the purchase a home next year might want to think about doing it before the end of this year, according to one economist.
"Those planning to get into the housing market in 2016 may want consider a home purchase before the end of the 2015," said Jonathan Smoke, chief economist for Realtor.com. "When rates go up, not only will monthly mortgage payments increase, that increase will also lessen some buyers’ ability to get approved for a home loan – due to an increased debt to income ratio."
The FOMC has two more meetings scheduled this year: October 27-28 and December 15-16.
Click here to view the entire text of Williams' speech.