NEW YORK The Federal Reserve may need to raise interest rates a bit more aggressively than the thrice-per-year pace forecast by Fed policymakers if the U.S. economy picks up steam as expected, a pragmatic Fed official said on Wednesday.Boston Fed President Eric Rosengren, a long-time dove who last year switched tack and began pushing for tighter monetary policy, said he expects the U.S. central bank to raise rates "at least as quickly" as the median Fed forecast from December.That forecast, based on 17 Fed policymakers, predicted three hikes in each of the next three years as inflation edges up to a target and gross domestic product (GDP) growth remains around 2 percent.But Rosengren, who dissented once in 2016 but does not have a vote on policy this year, said in a speech he expects a bit stronger GDP growth over the next two years as unemployment, now 4.8 percent, keeps falling below that equilibrium level.
"It will likely be appropriate to raise short-term interest rates at least as quickly as suggested by the Fed's current ... median forecast, and possibly even a bit more rapidly," he said. "If GDP is growing faster than potential and we reach both elements of the dual mandate, the Federal Reserve risks overshooting" those employment and inflation mandates, he added.
The Fed has tightened policy only twice in the last two years, bringing the key rate to a range of 0.5-0.75 percent. But expectations have grown for more hikes as investors anticipate that U.S. President Donald Trump and the Republican-controlled Congress will increase spending and cut taxes, and as low unemployment continues to boost wages.Rosengren said such so-called slack in the labor market is now "very limited," meaning inflation could rise more than expected. Yet he added that uncertainty around future fiscal policies as well as economic growth overseas stand out as "significant risks" to his relatively optimistic expectations.
(Reporting by Jonathan Spicer; Editing by Meredith Mazzilli)
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Updated Date: Feb 16, 2017 00:15:07 IST