The U.S. economy has healed enough to withstand a return to higher interest rates by the middle of 2015, the president of the influential Federal Reserve Bank of New York said Monday.
The Federal Reserve’s benchmark lending rate has been near zero since December 2008. After several years of purchasing government and mortgage bonds to stimulate the economy, the Fed is now readying to slowly notch up its lending rate_ a so-called lift-off_ because the economy is now healthier.
“Market expectations that lift-off will occur around mid-2015 seem reasonable to me,” said New York Fed Chief Bill Dudley, in a speech in New York outlining his economic outlook for 2015.
Since the Great Recession ended five years ago, he cautioned, there have been several false starts that looked like a return fast-paced economic growth.
“Subject to a few caveats … my view is that the likelihood of another disappointment has lessened,” said Dudley, who heads the most important of the Federal Reserve’s 12 district banks.
One reason for optimism, Dudley said, is that the overhang from too many homes built during the housing bubble has been absorbed in the housing market. Adding to the improvement, “a recovery in housing prices has significantly shrunk the proportion of borrowers that are underwater on their mortgages_ that is, those households that have outstanding mortgage balances higher than the value of their homes.”
Consumers are also in better shape, he said.
“Households are carrying less debt, with total household liabilities roughly $500 billion below their cyclical peak in 2008,” said Dudley, adding that layoffs from state and local government have eased and as the economy improves the government sector will grow again.
And if plunging oil and gasoline prices hold in the year ahead, it’ll be like a tax break for the less wealthy.
“Since energy expenditures represent a higher proportion of outlays for lower income households, falling energy prices disproportionately raise their real incomes,” the New York Fed chief said, adding that a $20 a barrel drop in oil prices has resulted in an income transfer of about $670 billion per year from oil producers to oil consumers.
All these factors point to a lift-off next year of interest rates.
“While raising interest rates is often portrayed as a difficult task for central bankers, in fact, given the events since the onset of the financial crisis, it would be a development to be truly excited about,” said Dudley, because “this would indicate that the U.S. economy is finally getting healthier.”