Former Fed Gov. Mishkin: Fed Must Consider Aggressive Rate Hikes

Most economists expect the Federal Reserve will begin raising interest rates next year, and most believe the hikes will be small.

But former Fed Gov. Frederic Mishkin, now a professor at Columbia University's Business School, says the central bank must consider large rate increases once it moves. The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent for six years.

Given the current low level of inflation, "my view is a sensible strategy for the Fed is to be patient, not to be trigger happy to raise rates," he told MarketWatch.

But the Fed must "recognize that does mean they may get to a point where they have to raise rates faster than they otherwise would."

The Fed's favored inflation gauge, the personal consumption expenditures price index, climbed only 1.4 percent in the 12 months through October. That's far below the Fed's target of 2 percent.

But, "if you start to see wage growth picking up, that businesses start to see more pricing power, that you see some evidence in fact that prices are starting to rise at a faster rate, . . . that would actually mean they would need to be more aggressive in terms of raising rates," Mishkin said.

Rick Rieder, chief investment officer of fundamental fixed income at BlackRock, doesn't expect big rate hikes.

"When they move, they will move to a 1 percent fed funds rate [next year], which on a historic basis is an incredibly low and incredibly accommodative policy," he told USA Today. Rieder believes the Fed will hold the fed funds rate "under 2 percent for at least a number of years."

Related Stories:

• Economist Rupkey: Fed Should Raise Rates in December
• Gundlach: Fed May Raise Rates Next Year 'Just to See What Happens'