Daily Times

JACKSON HOLE: Federal Reserve policymakers are signaling they could raise US interest rates soon but they are already weighing new tools they may need to fight the next recession.

A solid US labor market “has strengthened” the case for the first rate increase since last December, Fed Chair Janet Yellen told a central banking conference in Jackson Hole, Wyoming. Several of her colleagues said the increase could come as soon as next month if the economy does well.

Further rate hikes are expected to be few and far between as the US central bank tries to balance a desire to fuel growth against worries it could overheat the economy.

But Fed officials at three-day conference that ended Saturday also said they need to consider new policy tools for use down the road, such as raising the inflation target or even Fed purchases of non-government-backed assets like corporate debt. Such ideas would test the limits of political feasibility and some would need congressional approval. The view within the Fed is that it could take effort to win over a public already skeptical of the unconventional policies the Fed undertook during the last crisis.

Policymakers think new tools might be needed in an era of slower economic growth and a potentially giant and long-lasting trove of assets held by the Fed. And they are convinced the time to vet them is now, while rates look to be heading up.

“Central banking is in a brave new world,” Atlanta Fed President Dennis Lockhart said in an interview on the sidelines of the conference.

At the center of the Fed’s discussions is its $4.5 trillion balance sheet, built up by bond-buying sprees to combat the 2007-09 recession but which has been criticized by many lawmakers. While policymakers have maintained the Fed should eventually reduce its bond holdings, Lockhart said some officials were closer to accepting that they needed to learn to live with them.

“I suspect there are colleagues who are contemplating at least maybe a statically large balance sheet is just going to be a fact of life and be central to the toolkit,” he said.

Officials have said they will slowly let the balance sheet shrink, a process that would take years and would not begin until interest rate increases are well underway. Substantial progress could be made only in a very long-lived economic expansion.

“I am sure everyone in the audience would be happy if this were the reality. I certainly would be,” Simon Potter, the New York Fed’s markets chief, said during the conference.