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The U.S. central bank can increase interest rates gradually as inflation rises and the labor market achieves full employment, according to two regional Federal Reserve presidents, though they took different views on how many hikes would be needed this year.
"The economy today is well positioned for moderate growth and steadily improving conditions," Atlanta Fed chief Dennis Lockhart said Monday. "It's less certain that the economy is positioned for a breakout to markedly higher growth on a sustained basis."
U.S. central bankers are weighing how quickly to raise interest rates this year amid investor optimism that President-elect Donald Trump can shake the economy out of its low-growth rut by delivering tax cuts, investment and regulatory reforms that also lift price pressures.
Lockhart, who is retiring at the end of next month, said he hadn't included the effects of those plans in his estimates of growth because it was too soon to make a judgment without more details. He said he viewed fiscal stimulus as an "an upside risk factor" that could warrant three quarter-point rate increases in 2017, though he'd forecast two moves.
"I was on the more cautious side of the two versus three move split. My position was two in 2017," he told reporters after the speech. "My position a year ago was four — look what happened." The Fed moved rates once in 2016, in December.
Officials last month were shifting their focus toward the risk that expansionary fiscal policy from the Trump administration may warrant a faster pace of rate hikes than expected, minutes of the Dec. 13-14 meeting showed. Their quarterly forecast also signaled three rate increases in 2017, according to the median estimate, compared to two in September.
Boston Fed President Eric Rosengren, who dissented in September last year in favor of raising rates, said he thought the median forecast "seems reasonable" provided the economy grew faster than it's so-called "potential" rate, which policy makers estimate is around 1.8 percent in the longer run, according to their December projections.
This would help the Fed achieve its dual goals for 2 percent inflation and maximum sustainable employment by the end of 2017 "and as a result, I believe that a still gradual but somewhat more regular increase in the federal funds rate will be warranted," he told an audience in Hartford, Connecticut earlier on Monday.
"Monetary policy will need to normalize more quickly than over the past year, but certainly not as rapidly as in the last tightening cycle, which began in 2004," he said. That referred to the tightening campaign begun under former Fed Chairman Alan Greenspan, when the benchmark rate was raised a quarter-point for 17 consecutive meetings of the Federal Open Market Committee. In contrast, the FOMC has so far increased rates just twice in this cycle, with the move last month following a similar-sized move in December 2015.