Fed's Rosengren signals ready to lift rates amid strong data

[WASHINGTON] Federal Reserve Bank of Boston President Eric Rosengren said encouraging US economic data coupled with emerging signs of risk taking by some investors make it appropriate for the central bank to consider raising interest rates as soon as next month, while moving gradually thereafter.

"All future committee meetings - including December's - could be an appropriate time for raising rates, as long as the economy continues to improve as expected," Mr Rosengren told an audience on Monday in Portsmouth, Rhode Island.

The policy-setting Federal Open Market Committee meets in Washington on Dec 15-16, when it will decide on whether to raise the benchmark federal funds rate for the first time since 2006. It has held rates near zero since late 2008.

Mr Rosengren cited a better-than-expected October US employment report and measures of retail spending that signal domestic demand is overcoming weakness abroad that hurts US exporters. He also pointed to early signs of a "search for yield" in the commercial real estate market encouraged by very low interest rates.

"When the number of cranes observed on a short walk in a city such as Boston reaches double digits, as is the case today, it is worth reflecting on the sustainability of such growth," he said.

"The trend in commercial real estate prices should be thoughtfully monitored." Investors have increased bets that the Fed will move next month to around 68 per cent, according to pricing in fed funds futures, from 56 per cent before publication of the October jobs report. That assumes the average effective funds rate after liftoff is 0.375 per cent.

Mr Rosengren, who votes next year on the FOMC, argued back in September that the US was not insulated from weaker growth abroad. He said Monday that robust domestic demand during the third quarter "suggests that the US was little affected by the problems in emerging markets, or by the resulting financial- market turbulence." Mr Rosengren said that unemployment, which fell to 5 per cent in October from 5.1 per cent the month before, was close to his own estimate of the long-run rate of joblessness, at 4.8 per cent.

"Clearly, we are seeing continued improvement in labor markets and a further reduction in the remaining labor market slack," he said.

The FOMC in October repeated that it awaits "some further improvement" in labor markets and more confidence that inflation will rise toward its target of 2 per cent in the medium term before lifting rates. At the same time, it signaled how close it was to that decision by explicitly mentioning its next meeting as a possible appropriate time for liftoff.

Mr Rosengren said he supported the October statement while repeating his preference for moving gradually thereafter. Moving slowly after liftoff would, he said, give policy makers time to assess the impact of higher rates on the economy and reduce the chances they would overshoot and raise rates too high.

"Given the uncertainties surrounding the degree of accommodation that is necessary to achieve 2 per cent inflation and full employment, I prefer a path that involves only gradual increases in interest rates and that essentially probes how tight labor markets can be, consistent with our 2 per cent inflation target," he said.

BLOOMBERG