| MENLO PARK, Calif.
MENLO PARK, Calif. May 29 A top Federal Reserve
official on Thursday called for the U.S. central bank to raise
interest rates soon after it winds down its bond-buying stimulus
and to raise them more sharply than most of her fellow
The Fed is on target to phase out bond-buying completely by
this coming fall. Fed Chair Janet Yellen has said short-term
interest rates will stay at their current near-zero level for a
"considerable" time afterward, and will then rise only
Kansas City Fed President Esther George, among the most
hawkish of Fed policymakers, staked out a dissenting view in
remarks prepared for delivery to a group of prominent economists
and fellow policymakers.
"I would like to see short-term interest rates move higher
in response to improving economic conditions shortly after
completion of the 'taper,'" said George, who does not have a
vote at the Fed's policymaking table this year but does
participate in the discussions.
Keeping rates low for as long as the Fed has, since December
2008, gives banks the incentive to take risks that could
threaten financial stability, she said. Continuing to keep them
low until even after the recovery is complete courts greater
risk-taking than is necessary, she said.
Fed officials on average forecast short-term rates to be at
just 2.25 percent by the end of 2016, well below the 4 percent
level that is the historical norm.
"The degree of inertia suggested (by that forecast) goes
beyond what is required to achieve a smooth exit" from the Fed's
near-zero rate regime, she said. "In my view, it will likely be
appropriate to raise the federal funds rate at a somewhat faster
When to raise rates is at the center of the current policy
debate at the Fed, which next meets in mid-June. Fed officials
have increasingly signaled they are sympathetic to the view that
low rates may threaten financial stability by fostering bubbles.
George said that while she believes supervisory and
regulatory efforts to keep bank risk-taking in check are
important, "I think monetary policymakers also need to maintain
a careful eye on the financial system and how interest rate
policy affects incentives for financial markets and
Once the Fed starts raising rates, financial markets could
become much more volatility, she predicted. But the Fed, she
said, must stick to its guns.
"In this environment, the pressure to quickly back away from
a rising rate policy will be significant; such pressures will
need to be resisted," she said. "If not, we risk moving into a
confusing stop-and-go policy environment."
(Reporting by Ann Saphir; Editing by Lisa Shumaker)