The Federal Open Market Committee could start raising rates "now," Federal Reserve Bank of St. Louis President James Bullard said Wednesday.
With the U.S. economy healthier than it has been for years, "Now may be a good time to begin normalizing U.S. monetary policy so that it is set appropriately for an improving economy over the next two years," Bullard told the 24th Annual Hyman P. Minsky Conference, according to a release from the Fed.
Should the Fed raise rates, Bullard reminded, "monetary policy will remain exceptionally accommodative."
Incoming data will determine the Fed's moves, he said, and better news or worse news could skew the policy rate path, the expected trend is economic improvement and higher rates. "To say otherwise risks the 'perma-zero' equilibrium experienced by Japan over the last two decades," Bullard noted.
While financial markets don't expect the Fed funds rate target to cross 0.50% until early next year, Bullard pointed to the FOMC's latest Summary of Economic Projections (SEP), which call for it to be breached earlier. "This difference of views on the nature of the U.S. policy rate path will need to be reconciled at some point."
Among the factors that still need to be watched, Bullard said, include the labor markets, GDP, and inflation. While the unemployment rate has fallen faster than expected, expectations are the labor markets are close to normal long-term performance. But Bullard suggested labor could overshoot projections in the next two years with highly accommodative monetary policy.
GDP, while underperforming in the first quarter, should hit 3% growth in the medium-term, he said. Lower oil prices and European quantitative easing, which pushed U.S. bond yields lower, are spurring U.S. growth. While Bullard expects inflation to move toward 2% "in coming months and quarters this bears careful watching. Inflation and inflation expectations moving away from target is a concern."
