ST. LOUIS (Reuters) - Debate within the U.S. Federal Reserve will quickly turn to the appropriate pace of monetary policy tightening after an initial rate hike, a battle that may be fought in an environment of unexpectedly higher inflation, St. Louis Fed President James Bullard said on Friday.
The unexpectedly strong U.S. jobs report on Friday raised the already strong likelihood that the central bank will raise rates in December, ending a seven-year run of near-zero policy.
But Fed policymakers will then have to tangle with how to make good on their promise of only raising rates “gradually” as they move forward, a debate that may come amid rising U.S. inflation and a jobless rate falling to as low as 4 percent, said Bullard, who is in favor of a rate hike and will become a voting member of the Fed’s rate-setting committee next year.
“Once ‘liftoff’ occurs the debate will immediately shift to when is the next move going to come? How fast is the pace of increases going to be? ... What does ‘gradually’ actually mean?” Bullard said. “That is going to be a hot debate and we won’t really have credibility as a committee for the notion of gradualness until we make that second move.”
Bullard said his own projections show inflation exceeding the Fed’s 2 percent target by the end of next year, which would possibly prompt the Fed to raise rates faster than expected.
The debate could prove challenging for a committee with members like Bullard who would likely react strongly to any inflation run-up, and others who feel it would be worth risking a period of higher prices if that also meant ultra-low unemployment and faster wage increases for workers who lost ground during the 2007-2009 recession and subsequent recovery.
The Fed has pointed strongly to a rate hike at its Dec. 15-16 policy meeting, and Bullard said it was clear many of the issues that caused the central bank to hold off at its September meeting are starting to fade.
Fear over a “hard landing” in China have decreased, Bullard said, with economic growth in the Asian nation still estimated at close to 7 percent and indexes of financial market stress now back to pre-market levels, Bullard said in a presentation to St. Louis-area financial advisers.
“What are the chances of a hard landing in China? ... The probability of a hard landing in China is no higher today than it was earlier this year,” when the Fed was progressing steadily towards higher rates, Bullard said.
Reporting by Howard Schneider; Editing by Chizu Nomiyama and Paul Simao