Fed Officials Start Laying Groundwork for Possible October Rate Hike

Federal Reserve policymakers began laying the groundwork for a possible interest-rate increase in October after the central bank declined to act last week because of concerns that financial market volatility could slow the U.S. economy.

“It’s too early to know whether this episode amounts to a bona fide shock to the economy or just a nervous spasm in the markets,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said Monday of the turmoil caused by China devaluing its currency last month.

At this point, “it’s too early to detect any significant impact on the real economy” in the U.S., he said in prepared remarks to the Buckhead Rotary Club in Atlanta. “For that reason, I thought it prudent to wait to evaluate whether recent developments change the outlook.”

Lockhart, a centrist, is one of the 10 voting members of the policy-setting Federal Open Market Committee. It voted 9-1 on Thursday to hold the central bank’s benchmark short-term rate at near zero percent after a much-anticipated two-day meeting last week.

The mixed messages from the policy statement and Fed Chair Janet L. Yellen’s news conference roiled financial markets further as investors were unclear about when the central bank might raise the rate.

Lockhart said Monday that he was confident the Fed would do so by the end of the year. The rate has been near zero since late 2008 in an attempt to stimulate the economy. The Fed meets again Oct. 27-28, then Dec. 15-16.

The labor market has healed enough for an interest-rate hike, he said, but he remains concerned about inflation continuing to run well below the Fed’s 2 percent annual target.

“As things settle down, I will be ready for the first policy move on the path to a more normal interest-rate environment,” Lockhart said.

John Williams, president of the Federal Reserve Bank of San Francisco, another centrist who is a voting member of the policymaking committee, said much the same thing on Saturday.

“Given the progress we’ve made and continue to make on our goals, I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year,” he said in a speech to a symposium in Armonk, N.Y.

On Monday, James Bullard, president of the Federal Reserve Bank of St. Louis, said that he had argued in favor of a rate hike last week.

He is a non-voting member of the committee and is viewed as more hawkish than most, meaning he places more emphasis on raising rates to try to avoid high inflation than keeping them low to try to spur job growth.

Bullard told CNBC that it was “inappropriate to react to financial-market turmoil” and that there was a “powerful case” that the U.S. economy was ready to slowly increase the rate.

He described last week’s Fed decision as a close call and said there’s a chance the Fed would act next month.

His comments echoed Yellen.

“Yes, October remains a possibility,” she told reporters Thursday. “And we will be looking at incoming developments, both financial and economic, to try to make sure we feel, really, that the U.S. economy is doing well.”

Anticipation was high for a possible rate hike last week because September was one of four policymaking meetings this year after which Yellen holds a news conference.

Analysts have said Fed policymakers would be more inclined to make a major move at such a meeting, when Yellen could explain it to try to avoid market turmoil. Her next post-meeting news conference is in December.

Fed officials have tried to keep open the possibility of action at any of its eight annual meetings by saying Yellen could hold an impromptu conference call with reporters if a news conference is not scheduled.

Bullard said Monday the Fed chair should hold a news conference after every meeting so “there’s no additional importance given to any particular meeting.”