CHICAGO – The Federal Reserve should start raising interest rates next year, a top Fed official said on Monday, arguing that many years of near-zero rates will do little to return economic output to pre-recession levels and risks causing “disaster.”
St. Louis Fed President James Bullard said he disagreed with the Fed’s decision last month to keep interest rates exceptionally low through late 2014 to bolster a recovery that was moving too slowly.
Bullard, who does not have a vote on the Fed’s policy-setting Federal Open Market Committee this year, is seen as a policy centrist.
“It’s important to start to remove accommodation — even when you go up to 1 percent or 1½ percent, that’s still very easy monetary policy,” Bullard told reporters. “It’s a matter of getting to a normal level of interest rates at the right time. I don’t think you want to wait until everything is exactly the way you’d expect it to be.”
Fed Chairman Ben Bernanke last month gave a bleak assessment of the economy and left the door open to new bond purchases to boost growth, a move that Bullard said he would support only if the economy worsened further and the threat of deflation re-emerged.
The Fed cut rates to near zero more than three years ago and has bought $2.3 trillion worth of bonds to spur economic activity.
Because the recession was brought on by a collapse in housing that destroyed household wealth, unemployment is likely to stay high and labor markets will improve only slowly even if rates are kept low for years, Bullard said.