Top Fed official calls for US interest rate to rise in 2013

THE Federal Reserve should start raising interest rates next year, a top Fed official said yesterday, arguing that many years of near-zero rates will do little to return economic output to pre-recession levels and risks causing “disaster.”

James Bullard, of St Louis Fed, said he disagreed with the decision last month to keep interest rates exceptionally low until late 2014 to bolster a recovery that was moving too slowly. Bullard, who does not have a vote on the Fed’s policy-setting federal open market committee this year, is seen as a policy centrist.

Fed chairman Ben Bernanke last month gave a bleak assessment of the economy and left the door open to new bond purchases to boost growth, a move that Bullard said he would support only if the economy worsened further and the threat of deflation re-emerged.

The Fed cut rates to near-zero more than three years ago and has bought $2.3 trillion (£1.45tr) worth of bonds to spur economic activity.

Because the recession was brought on by a collapse in housing that destroyed household wealth, unemployment is likely to stay high and labour markets will improve only slowly even if rates are kept low for years, Bullard said.

The belief that the US economy is suffering from an “output gap” that can be bridged only if borrowing costs are kept low enough for long enough is wrong, he said. “If we continue using this interpretation of events, it may be very difficult for the US to ever move off of the zero [level] on nominal interest rates,” he said. “This could be a looming disaster”

The US economy is on track to grow at 3 per cent this year and to strengthen further next year, Bullard said.

That should help push the unemployment rate below 8 per cent by the end of this year, he projected.