Fed officials still split on rate hike

Remarks by Federal Reserve policymakers Thursday highlighted a lingering rift over when to raise interest rates despite a growing consensus in financial markets that the central bank will act next month.

In the text of the speech he planned to deliver at noon, New York Fed chief William Dudley suggests he's amenable to a rate hike next month but says his decision will depend on economic reports in coming weeks. His comments are significant because he's considered to be among a core group of policymakers that has been guiding Fed decisions.

"I think it is quite possible that the conditions" the Fed has set to begin to raise rates "could soon be satisfied," according to the remarks, slated to be delivered at the economic club of New York.

The Fed hasn't boosted its benchmark rate in nearly a decade and it has hovered near zero since the 2008 financial crisis.

Dudley cites "the many positives of the economic outlook," including solid consumer spending and business investment growth and the housing recovery. His speech also notes that the risks to the U.S. economy from global troubles have eased recently.

"The economy looks to be in decent shape and is likely to continue to grow and a slightly above trend," Dudley says in the speech.

At the same time, he notes that inflation remains below the Fed's 2% annual target. While raising rates too soon could disrupt the recovery, waiting too long could allow inflation to accelerate too rapidly, his remarks say, adding that he sees the risks "as nearly balanced."

Other Fed officials who spoke earlier Thursday offered more emphatic perspectives on opposing sides of the debate. St. Louis Fed chief James Bullard, who's considered a more "hawkish" official who worries more about inflation, suggested the Fed should raise rates as soon as possible. He said an inflation rate that attempts to adjust for the broader effects of low oil prices is 1.7%, close to the Fed's target. Bullard, who spoke at the Cato Institute, also cited the 5% jobless rate.

"By these measures, the (Fed's) goals have been met," said Bullard, who is not a voting policymaker this year but still attends and speaks at meetings. "A simple and prudent approach to current policy is to move the policy settings closer to normal levels….There is no reason to continue to experiment with extreme policy settings."

Fed Chair Janet Yellen last week told Congress that a rate hike in December is a "live possibility." And San Francisco Fed chief John Williams told Paste BN in an interview this week there is a "very strong case" for a rate increase next month, assuming the economy continues to progress. Both Yellen and Williams are considered to be among Fed centrists whose views have largely steered policy decisions.

Earlier, Chicago Fed president Charles Evans, who's considered one of the Fed's more "dovish," or pro-growth policymakers, said he wants to wait, citing still meager inflation and the risk of derailing the recovery.

"A later liftoff and… a more gradual (pace of rate increases) will best position the economy for the potential challenges ahead," Evans, a voting member of the Fed's policymaking committee, said in a speech at the National Communities Counsel in Chicago.

"Before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher," Evans said. He noted that the Fed's preferred measure of core inflation, which strips out volatile food and energy costs, is up just 1.3% over the past year, well below its 2% target, and overall inflation is just 0.2%.

Other Fed policymakers expect inflation to return to the Fed's goal by the end of 2017 as the effects of a strong dollar and low oil prices dissipate, but Evans said he expects core inflation to be just under 2% even at the end of 2018.

Evans added a premature rate increase could disrupt the recovery. "One possibility is that we begin to raise rates only to learn that we have misjudged the strength of the economy or the upward tilted inflation." The Fed, he said, then would have to cut rates to zero again and possibly even revive its controversial bond-buying stimulus.

Evans acknowledged that the 5% unemployment rate is already near the Fed's long-run goal, but he said other labor market indicators, such as part-time workers who prefer full-time jobs, still indicate "slack."

"I don't think we're quite there yet, but we have made good progress toward meeting our employment mandate," Evans said.

He added that the housing recovery is picking up but "still has a good way to go."

Some Fed officials worry that waiting too long to bump up rates could allow inflation to heat up, forcing the Fed to lift rates so rapidly that it disrupts markets and economic growth. Evans said such concerns "seem overblown to me." Fed policymakers now expect to raise rates by a quarter of a percentage point every other meeting, or about a percentage point each year. Evans said a similar hike every meeting, or two percentage points a year, is "hardly a steep path of rate increases."