Fed officials remain divided over timing of rate hike

WASHINGTON – Remarks by Federal Reserve officials Tuesday showed continued divisions over whether to raise interest rates this year.

Fed board Governor Daniel Tarullo said he didn't expect the central bank to lift its benchmark rate for the first time in nearly a decade in 2015.

"I wouldn't expect it would be appropriate to raise rates" this year, he told CNBC. Citing economic troubles overseas, he said the risks of acting prematurely outweigh those of hoisting rates later.

Tarullo is considered a "dove" who's typically more worried about stifling growth then heading off inflation. Since his approach is roughly similar to that of Fed Chair Janet Yellen, his comments could reflect the views of key Fed policymakers.

By contrast, St. Louis Fed chief James Bullard said the Fed's key rate already should be 2% by some measures, not the current near-zero level. He urged the central bank to begin raising the rate.

Bullard argued that the Fed's dual targets of 2% inflation and an unemployment rate of 4.9% have been "arguably" met. Speaking in a meeting of the National Association for Business Economics Tuesday, he urged the central bank to start interest rate hikes even in the face of low interest rates globally and increasing global financial instability.

The Consumer Price Index, excluding food and energy, has risen 1.8% over the 12 months through August. The unemployment rate was 5.1% in September, according to the Bureau of Labor Statistics.

He also said the economy could keep growing even with a slow rise in rates. He was optimistic about achieving economic growth of 2.5% to 3% this year and predicted the unemployment rate would continue to fall to 4% over time.

Bullard is considered a "hawk" who worries more about preventing runaway inflation from damaging economy.

Bullard said keeping the Fed's current low rates for a long period could create another financial bubble. "I do think that the main problem the U.S. economy had in the last 20 years is really asset values getting out of hand and then subsequently collapse," he said.

Even though he doesn't expect an asset bubble in the near term, Bullard said he's worried that if near-zero interest rates continue in the next few years, they would combine with the expanding economy, to create bubbles.

"That is a recipe for inflated asset prices that will eventually bust," he told reporters after his speech to the business group..

In particular, he said the ratio of household wealth to household income should be flat in normal times, but it rose during the Internet bubble in the late 1990's and the housing bubble in late 2000's. Bullard said the value of the ratio today was close to the previous peaks, which worries him.

"A more prudent policy would be to raise interest rates gradually and slowly to mitigate that risk and extend the life of expansion," he said.

However, He predicted the Fed would not increase the rate at its October meeting. "I think it is very tough for the committee to make a big decision and then change it after only one meeting because you only have limited amount of data between meetings."

In September, the Fed voted to keep interest rates unchanged because of low inflation and global economic instability, including China's economic slowdown and stock selloff. Fed policymakers indicated they still expected to act this year, but financial markets expect a delay until 2016, according to the fed funds futures contracts.

Bullard said the rate should be raised gradually. He said the economy could keep growing even with a slow rise in rates. He predicted the current 5.1% unemployment rate still could drop to 4%.