Calling for an interest rate hike "early next year, or potentially sooner," Federal Reserve Bank of Dallas President and CEO Richard W. Fisher, said Wednesday, "I believe we need an adjustment to the stance of monetary policy."
"I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose too long." Fisher told an audience in Los Angeles, according to prepared text released by the Fed. By not raising rates, it risks damaging the economy and "being viewed as politically pliant."
"One might posit that by tapering our large-scale asset purchases with an eye to eliminating them in October, we have begun advance targeting with an eye to living up to our congressional mandate," Fisher said. "My sense is that ending our large-scale asset purchases this fall, however, will not be enough."
Once the asset-purchases end, the Fed should stop its "reinvestment of maturing securities," thereby decreasing its portfolio. "I do not think this would have significant impact on the economy," Fisher said. "Some might worry that paring our reinvestment in MBS might hurt the housing market. But I believe the demand for housing is sufficiently robust to continue improving despite a small rise in mortgage rates." Then "early next year, or potentially sooner depending on the pace of economic improvement, the FOMC may well begin to raise interest rates in gradual increments, finally beginning the process of policy normalization."
Fisher also said the Fed is "closer than many think" to meeting its dual mandate.
In terms of labor, Fisher said, "conditions are improving smartly, quicker" than expected, specifically new job creation. "Both statistically and anecdotally, we are now getting a consistent message from a variety of sources that the labor market, broadly considered—and not just in booming regional economies like Texas'—is tightening. The employment gap is closing faster than most forecasters foresaw. "
As for prices, Fisher noted "the 12-month consumer price index (CPI), the Cleveland Fed's median CPI, and the so-called sticky CPI calculated by the Atlanta Fed have all crossed 2 percent, and the Dallas Fed's Trimmed Mean PCE inflation rate has headline inflation averaging 1.7 percent on a 12-month basis, up from 1.3 percent only a few months ago. PCE inflation is clearly rising toward our 2 percent goal more quickly than the FOMC imagined."
Saying there is no reason to panic about inflation, Fisher said "I am willing to tolerate temporarily overshooting the 2 percent level in the case of supply shocks, as long as inflation expectations are firmly anchored. But given that the inflation rate has been accelerating organically, I don't believe there is room for complacency."
