The Federal Reserve should raise interest rates “towards the middle of this year” to avoid risks of acting too late, Kansas City Fed president Esther George said Wednesday.
“I think the economy is ready for a change in interest rates,” George said in presenting her annual economic outlook at the Central Exchange in Kansas City.
A “liftoff” at midyear would let the Fed gradually shift its highly stimulative monetary policy closer to normal, George said. And the economy is approaching normal conditions, she said.
“If you wait until the economy is back to normal … then you risk putting policy behind the curve and you may have to raise rates more quickly,” George said.
A series of quick interest rate increases to catch up to where rates should be would pose risks of disrupting financial markets and slowing the economy’s growth, she said.
The Fed’s debate has focused on a question of when to raise rates rather than whether to take the first step away from the zero interest rate policy it adopted in late 2008.
Some, like George, advocate a move at midyear. Others say September, and some predict the Fed will wait until 2016 to lift its benchmark rate.
Last week, Fed chair Janet Yellen told Congress that the Fed’s policy group would remain “patient” about raising interest rates, given conditions in the job market and low inflation.
As head of the Kansas City Fed, George is a regular participant in the Federal Reserve’s policy discussions but does not vote this year on the group’s decisions. She will have a vote next year.
Like Yellen, George made her case based on the job market and the inflation outlook but characterized each as approaching a balance that should move the Fed into action sooner rather than later.
The unemployment rate, 5.7 percent, has fallen to within a half point of what many consider the long-run normal rate, she said. The number of unemployed workers per job opening has fallen to 2 from 7 at the depth of the financial crisis. More workers are quitting jobs to take other jobs, and they’re getting 5 percent more pay in the process.
Although the job market is not yet normal, George said, it is on pace to reach that point this year. The next update on the health of the job market will come Friday when the U.S. Department of Labor releases the February unemployment report.
Inflation has remained low and allowed the Fed’s policy group to keep interest rates low longer to support economic expansion and employment. The Fed sets a target of 2 percent inflation, and falling oil prices have depressed the overall inflation level recently.
George said energy prices are volatile and likely to level off, which would reveal that rent and other prices are pushing inflation higher. She expects wages, a key factor in overall price inflation, to climb.
As the economy strengthens, George said, the Fed’s policy needs to strike a balance between its goals of stable prices and full employment. Taking the first step to raise rates at the Fed’s midyear policy meeting would give policymakers the flexibility to decide when the next step up should come.
“We’ve had experiences in the past where waiting too long and going quickly has its own implications to the economy, including causing high levels of unemployment,” George said. “It has been my preference to interpret ‘balanced approach’ as meaning, ‘Let’s raise rates now and go gradually to allow the economy time to adjust.’”
Last year, the Fed ended another program to boost the recovery when it stopped buying bonds, a policy called quantitative easing or QE.
A bump up in interest rates by the Fed would continue its move toward more normal policies. It also would come as central banks in some other countries are lowering their key interest rates amid weakening economies.