U.S. Federal Reserve officials have backed investors’ expectations of an interest rate hike next month, expressing confidence that the U.S. economy is now ready for a modest tightening of monetary policy.
Atlanta Fed President Dennis Lockhart said global financial markets have settled since the August turmoil that caused the Fed in October to delay raising rates.
“I am now reasonably satisfied the situation has settled down … So I am comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions,” he told a conference of bankers, traders, and regulators in New York on Wednesday.
Last week, Cleveland Fed President Loretta Mester said the time to hike rates is “quickly approaching” and the Fed should not delay for fear of an adverse market reaction or uncertainty over how much the U.S. economy can grow without generating high levels of inflation.
As Reuters reports, the Fed’s October statement “helped convince skeptical markets that a rate hike may finally be imminent after several years of near-zero rates. But the October session also saw central bankers begin grappling with longer-term issues that may be relevant to the pace of subsequent rate hikes, including whether the U.S. economy’s lower long-term potential means low interest rates will become a permanent norm.”
“For now, however, Fed officials seem confident that the central bank will meet its twin goals of full employment and stable two percent inflation,” Reuters added.
New York Fed President William Dudley told the New York conference he does not expect a “huge surprise” or major market reaction to a hike in part because it has been so loudly telegraphed.
“A key point regarding inflation is that conditions have not been deteriorating, just hanging below target,” Lockhart said. “On balance for me, the data have been encouraging and affirm that the economy has been growing at a moderate pace.”
Investors reacted to the Fed officials’ comments at the conference by increasing the odds for a rate increase next month to 72%, from 64% on Tuesday, based on interest rate futures prices.