Fed won't be easily swayed from December rate hike

November 15, 2016 10:26 AM

Only "significant negative news" could derail the Federal Reserve's high expectations for raising U.S. interest rates next month, a Fed official who has recently advocated for policy tightening said on Tuesday.

Boston Fed President Eric Rosengren, a historically dovish policymaker who surprised some in September when he joined the minority in advocating a rate rise, said the U.S. economy should hit its inflation goal next year and could well go too far in driving unemployment lower.

In arguing that a modest tightening was needed to avoid a sharp policy change in the near future, Rosengren's speech, among the first by Fed officials since the U.S. election, appeared to reinforce market expectations—now above 75 %—for a mid-December hike.

"Absent significant negative economic news over the next month, the market's assessment of the likelihood of tightening in December seems plausible," Rosengren, a voting member of the Fed's policy committee this year under a rotation, said in prepared remarks.

The Fed, having raised rates last December, has since stood pat and did so again at a policy meeting just before this month's presidential election.

Rosengren decided not to dissent again in November because, he said, changes in the Fed statement "were well aligned with the notion (and the market perception) of a high likelihood of tightening in December."

Investors reacted to the shock election of Republican Donald Trump by selling Treasuries and buying U.S. stocks, an effective bet that fiscal stimulus will boost U.S. inflation, which has remained below the Fed's 2% target for years.

Rosengren said he expects the central bank's preferred price measure, now 1.7 %, to reach target next year.

"I would much prefer that tightening be gradual, and that policymakers try to avoid circumstances in which we need to tighten more quickly," he said, so to avoid disrupting an economy that is "now attaining" the Fed's inflation and employment goals.

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Jonathan Spicer, Reuters