I personally doubt that the funds rate is going to start to increase before the middle of 2015, Chicago Federal Reserve Bank president Charles Evans told the Credit Suisse investment conference in Hong Kong. I think it ought to increase later than that.
Raising rates earlier, whether to head off the risk of financial instability or unacceptably high inflation, could dangerously depress already low inflation and derail a recovery that is finally gaining steam, Evans said.
If we go out and pound that message repeatedly, then it gets every economy a chance to get their own house in order and deal with their own financial situation and we will all grow together, he said.
Last week, Fed chair Janet Yellen roiled financial markets by saying that after the Fed wraps up its bond-buying stimulus, likely before the end of the year, rate rises could come around six months later.
US inflation has been stuck at around 1% since early 2013, and Evans said that indicated the need to keep policy accommodative. When we get up to 2% inflation, we will revert to more normal monetary policy, Evans said. He expects the federal funds rate to be at 1.25% at the end of 2016.
His outlook for rates differs starkly from St Louis Fed president James Bullard, who spoke at the conference earlier this week. Bullard told Reuters he expected the Fed to start increasing rates in the first quarter of next year, and lift them to 4% to 4.25% by the end of 2016.
Most other Fed policymakers see rates rising no higher than 3% by the end of 2016. The US central bank publishes the views of its policymakers on the appropriate rate path, but does not identify who is making each individual projection.
Markets have proved sensitive to those projections, with traders moving forward their expectations for a first Fed rate hike after last weeks release showed some officials believed monetary policy should be tightened slightly more aggressively than they had felt in December.
Traders of short-term US rate futures are currently are making nearly even odds of a first Fed rate hike in April 2015, with better-than-even chance of a rate hike in June 2015.