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Fed's Stern says markets right to expect rate rise

Financial markets are right to expect the Federal Reserve to start raising interest rates, Minneapolis Fed President Gary Stern said on Wednesday.
/ Source: Reuters

Financial markets are right to expect the Federal Reserve to start raising interest rates, Minneapolis Fed President Gary Stern said on Wednesday.

"As I look at the futures market there's a widely anticipated move in interest rates coming, and I think that is appropriate at this stage," Stern told CNBC Television in the clearest comment yet from a Fed official about a rate hike.

Strong U.S. job growth and rising prices have convinced financial markets Fed policy-makers will bump up rates this summer, probably as soon as their next meeting in late June.

Futures markets are pricing in a quarter percentage point increase in the 1.0 percent federal funds rate at the Fed's June meeting, and a second rate rise in August.

It is "hard to be very precise" on the timing of the Fed's move since much is contingent on economic news, Stern said.

"Right now the economy is performing well and most signs are positive, but there's always the possibility of a surprise -- positive or negative," he added.

Stern noted rates had already moved higher in the bond market since the March U.S. payrolls report. Treasury yields have risen by more than one percentage point in recent weeks.

The Fed official said inflation should remain "modest" and made clear that lifting official U.S. rates from rock-bottom levels was not aimed at slowing the expansion but at ensuring growth will be maintained for a long period. He cited as an example the record 1990s expansion.

"It's not in my mind a question of stemming the growth rate, but making sure that the growth can be sustained for an extended period of time," he said.

Stern said the recent surge in oil prices would crimp consumer spending but that the overall economy will hold up.

"The economy is fundamentally very resilient and flexible and I think will adjust reasonably well to fluctuations in energy prices," he said. The recent rise in oil prices has lifted a barrel of crude to more than $41 in the last week.

Unlike some of his Fed colleagues, Stern did not sound unduly concerned about the recent increase in inflation.

The consumer price index has come in above market expectations for three months in a row.

"We haven't seen much of an uptick in inflation, maybe just a touch so far, and I'm optimistic that we can keep inflation at a quite modest pace going forward," he said.

The core U.S. consumer price index, which strips out volatile food and energy costs, rose 1.8 percent in the 12 months through April, marking a sharp acceleration from the 38-year low of 1.1 percent that prevailed through January.

Stern is not a voting member of the Fed's policy committee this year.

Stern, as he has in the past, played down financial markets' view that the Federal Reserve's stance is the most critical in determining how the economy fares.

"The economy ... doesn't require that the Federal Reserve get policy precisely correct every day or every month for the economy to do well. I think the economy will tend to do well left to its own devices for much of the time," he said.