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 One Fed Board member, Jeremy Stein, said that it should. The other,
Minneapolis Fed President Narayana Kocherlakota, disagreed.
The two former economics professors debated in the jargon-laden
lingo and polite tones of lifelong academics at a conference held in
the Fed's Washington headquarters.
But it suggested the real-life tensions that loomed as Janet Yellen
ran her first policy-setting meeting earlier in the week, in the Fed
building across the street.
As the world's most powerful central bank winds down its massive
bond stimulus program aimed at bolstering the U.S. jobs market, Fed
officials appear increasingly worried that keeping policy so easy
for so long could encourage investors to take too many risks,
building bubbles that may eventually pop and roil financial markets.
Stein has warned publicly for a more than a year that low rates
could be stoking financial instability, and on Friday argued that
excessively low expected returns in the bond market may be a sign
that it is time to reduce Fed stimulus, even if doing so hurts jobs.
Kocherlakota for his part argued that the cost of raising rates to
head off the unlikely possibility of a crisis is simply not worth
it.
Indeed, he wants to add to the Fed's monetary accommodation by
promising to keep rates near zero until unemployment reaches a
healthy 5.5 percent, and earlier this week dissented from the Fed's
policy decision in part because his colleagues would not agree to
peg rate decisions to the unemployment rate.
At a separate conference of economists on the other side of
Washington, a top Fed official appeared to defend Yellen's
market-roiling remark earlier this week that suggested the central
bank could raise interest rates next spring, around six months after
ending its massive bond-buying program.
"On the considerable period being six months, the surveys that I had
seen from the private sector had that kind of number penciled in,"
St. Louis Federal Reserve Bank President James Bullard said during a
lunch with journalists at the Brookings Institution. "That wasn't
very different from what we had heard from financial markets. So, I
just think she's just repeating that."
After a two-day policy meeting on Wednesday, the Fed said it
expected to keep benchmark interest rates near zero for a
"considerable time" after it wrapped up a bond-buying stimulus
program, which it is widely expected to do toward the end of the
year.
Pressed on the statement at a news conference afterward, Yellen said
the phrase "probably means something on the order of around six
months or that type of thing." Stocks and bonds immediately tumbled
as traders took the statement to suggest rate hikes could come
sooner than they had anticipated.
Futures traders on Friday continued to bet that April 2015 would
mark the Fed's first rate hike. That's three months earlier than
they had thought before the Fed's policy-setting meeting.
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At the Fed on Friday, the Bank of England's chief economist told
fellow economists and policymakers that central bankers should stick
to telling markets the economic conditions that could set the stage
for rate rises, rather than the timing of them.
"I know I don't know what will happen to interest rates in the next
six to 12 months," said Spencer Dale who coincidentally was speaking
in the same room where Yellen had made the contentious remark two
days earlier.
Yellen did not attend the conference Friday.
In London, Richard Fisher, the hawkish chief of the Dallas Fed,
dodged a question about how he would define "considerable time."
But in answering a separate question related to the Fed's tools for
exiting its extremely easy monetary policy, he suggested a rate hike
was still a long ways off.
"I'm not going to put a time frame (on it) ... It will be quite some
time," he said.
The question over when the U.S. central bank will first raise rates
from the near-zero level they have been since late 2008 is critical
to households and businesses alike as they make their plans for
spending, investment and hiring.
Yellen has argued that clear communications about the Fed's policy
intentions are key.
With the goal of transparency in mind, the Fed since December 2012
had promised to keep rates low until the unemployment rate fell to
at least 6.5 percent, as long as inflation did not threaten to rise
above 2.5 percent.
But now that unemployment has fallen to 6.7 percent, and the Fed's
preferred gauge of inflation is still little more than half of its
2-percent target, policymakers this week decided to jettison that
guideline.
(Additional reporting by Ana Nicolaci da Costa and Natsuko Waki in
London and Ann Saphir in Washington; writing by Ann Saphir and Jason
Lange; editing by Lisa Shumaker)
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