Federal Reserve officials on Wednesday continued to flag December as a possible time to raise interest rates after seven years near zero, with two expressing confidence they will be able to pull it off smoothly despite fears of an abrupt market reaction.
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Investors reacted by increasing the odds of a rate hike next month to 72 percent, from 64 percent on Tuesday, according to futures markets.
Cleveland Fed President Loretta Mester repeated her position that the U.S. economy is now strong enough to absorb a modest policy tightening. Atlanta Fed President Dennis Lockhart, sitting alongside her on a panel in New York, said global financial markets have settled since the August turmoil that caused the U.S. central bank to delay raising rates.
"I am now reasonably satisfied the situation has settled down ... So I am comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions," Lockhart told a conference of bankers, traders and regulators.
"I believe it will soon be appropriate to begin a new policy phase," he said, adding he will monitor economic data between now and a meeting on Dec. 15-16, for which he has a vote on policy. Mester regains a vote next year under a rotation.
The comments came ahead of the publication on Wednesday of minutes of an October policy meeting at which the Fed, wanting to send a message to skeptical markets, issued a statement that specifically referenced December as a possible time for rates liftoff.
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The comments were the latest in a string of communications from Fed officials meant to encourage global markets to prepare for the first U.S. rate hike in nearly a decade. The policy change is expected to accelerate an ongoing market direction of strengthening the U.S. dollar and sucking funds from emerging markets.
New York Fed President William Dudley, whose branch of the central bank will use a handful of new levers to wrench rates up from near zero, told the conference he does not expect a "huge surprise" or major market reaction to a hike in part because it has been so loudly telegraphed.
Trillions of dollars of reserves parked at banks and worries that the bond markets are less liquid and stable than in the past have added to concerns that deep volatility could greet the Fed rate hike.
Lockhart said he was "very confident" in the new tools and noted that the big focus now was deciding whether to make the policy change at a meeting next month.
He said that any lingering concerns about U.S. labor market strength have been satisfied for a rate hike. Inflation he said was less clear, but he expects prices to rise as the downward pressure from a strengthening dollar and falling oil prices fades.
"A key point regarding inflation is that conditions have not been deteriorating, just hanging below target," said Lockhart, seen as a centrist among the Fed's 17 policymakers. "On balance for me the data have been encouraging and affirm that the economy has been growing at a moderate pace."
(Reporting by Jonathan Spicer and Rodrigo Campos; Editing by Chizu Nomiyama and Meredith Mazzilli)