The Federal Reserve wants to give you some good news: Interest rates could rise in 2015!
That was the message from two of the central bank’s top officials, Chair Janet Yellen and New York Fed President William Dudley, during remarks Friday at an economics conference in France. The event was focused on the future of central banking, and both officials tried to accentuate the positive.
The Fed has been scaling back its support for the economy over the past year, ending its roughly $3 trillion bond-buying program last month. Now it is seriously considering when to raise its target for interest rates, which have been at zero since the 2008 financial crisis. In her prepared speech, Yellen emphasized that the moves are a sign of a stronger recovery -- not, as some critics suggest, a reflection of a Fed out of firepower.
“The normalization of monetary policy will be an important sign that economic conditions more generally are finally emerging from the shadow of the Great Recession,” Yellen said.
Dudley made the same point in his prepared remarks, reiterating that he expects the first increase in rates to occur “sometime next year” if the economy continues to progress as forecast.
“For the United States, the start of the normalization of U.S. monetary policy will be a very welcome development,” he said. “It will indicate that the U.S. economy has made great strides in healing itself from the damage caused by the U.S. housing boom and bust and the financial crisis.”
It seems an obvious point: The ultimate goal of the Fed’s easy-money policies of the past six years has been to foster a stronger economy. So it’s only logical that these actions would stop once the recovery reached escape velocity. Mission accomplished.
But monetary policy is rarely that simple. There is vigorous internal debate at the Fed over when the economy will be strong enough to stand on its own -- and whether the central bank has already coddled it too long. Wall Street is worried that a return to “normal” is actually code for “bear market,” as the Fed’s stimulus efforts have helped fuel record gains in the major U.S. indexes. Emerging markets fear investors who sought high-risk returns in their countries will flee once interest rates start to rise in America.
Both Yellen and Dudley acknowledged the potential for global volatility when the Fed finally moves. But they both emphasized that the central bank will be transparent and is committed to communication. And at the end of the day, their argument goes, a strong U.S. economy will banish all fears.