Interest rates might begin to rise next year, Fed official says at Kentucky State University

FRANKFORT — Interest rates might begin to rise gradually in 2015, a Federal Reserve Bank of Cleveland executive told a Kentucky State University audience Tuesday.

This time next year, interest rates might increase by 1 percentage point, said LaVaughn Henry, a vice president and senior regional officer of the Fed's Cincinnati office and a member of the KSU Board of Regents.

"That 1 percent means Treasuries (Treasury bonds and other securities used to finance the government debt) will be a little bit higher," Henry said. "That mortgage rate may be a little bit more. Then two years out, that 1 percent may become 2 percent, a gradual move. The point is this: the movement will be gradual. It will be a slow movement over time."

If the economy begins to pick up faster than it has shown so far, rate changes might occur more rapidly, Henry said. Likewise, if the economy slows, rates might not go up.

The Federal Open Market Committee, the group within the Federal Reserve System that sets a target for the funds rate — which in turn affects interest rates on car loans and home mortgages — doesn't think the time has come to make a change in policy.

However, 14 of the committee's 17 members said in a recent poll that they thought next year would be the time to move rates, Henry said. "The vast majority of the policy-making body of the Fed sees the economy next year as being well positioned to sustain a move in rates," he said.

"The economy has grown to the point where it's not in recovery any more; it's actually in expansion mode," Henry said. "In fact, believe this or not, we actually have one of the strongest job markets in this country now than we have had in almost the last 20 years. It's improved that much. Wages haven't improved that much, but employment has."

Inflation, now at about 1.7 percent, has been low because there has been "significantly muted wage growth" nationally during the past 15 years, Henry said.

As people consume less, that puts less pressure on the economy. "Less pressure on the economy pushes down inflation," he said.

Other factors, including lower gas prices, are keeping inflation low.

"That's actually a good thing in the near term because that allows the economy to expand even more and put more people to work without us having to make that move in rates," Henry said.

"We expect this low-inflation environment to continue for the next two to three years and eventually stabilize at 2 percent."