Amid rate-hike debate, Fed officials eye crystal ball

By Jonathan Spicer and Kevin Gray

ST. LOUIS/MIAMI (Reuters) - Two top policymakers said on Wednesday the Federal Reserve was in no rush to raise interest rates and would have to see improvements in the U.S. economy to do so.

The comments from St. Louis Fed President James Bullard and Dennis Lockhart of the Atlanta Fed, though not ground breaking, did reinforce the notion that accommodative monetary policies would remain in place for a while to come despite intense market speculation over the timing of tightening.

Bullard, speaking to reporters at his branch of the U.S. central bank, said a formal rate rise is "still a considerable distance away." Last week, he told Reuters the hike should come in the first quarter of next year, among the most hawkish predictions of the Fed's 16 policymakers.

Lockhart, who like Bullard does not have a vote on Fed policy this year but nonetheless participates in the discussions, said the economy needs to be growing at roughly 3 percent to justify a hike in the second half of next year.

Speaking in Miami, Lockhart said he thinks the economy will perform that well beginning in the current quarter and continue that trend in coming quarters. The faster growth would help some part-time workers get more hours at their jobs and goad more people who are out of work to restart their job hunts, he said.

Both Lockhart and Bullard repeated that signs of weak growth in the first quarter would likely prove temporary because they were due to a severe winter, with Bullard warning it would take "several months" to understand the extent of the weather-related slump.

The Fed is just beginning its trickiest policy reversal ever, having started in January to reduce the pace of its aggressive and stimulative bond-buying program, which is set to expire by December at the latest.

Last month, the Fed said it would be a "considerable period" between the end of the asset purchases and the beginning of interest-rate hikes. But then Fed Chair Janet Yellen added the period could be "six months or that type of thing," triggering a market selloff and prompting futures traders to predict the hike will come in June of next year.

The Fed also said that, in the longer run, it expects to keep its target federal funds rate below normal levels even after employment and inflation reach the central bank's goals.

Asked about this line in the policy statement, Bullard said "real interest rates look low, and look like they'll continue to be low."

While there are competing theories as to why this may be the case, he said the best explanation was simply this: "There's just a lower real interest rate environment that's been going on for a long time and therefore the real component of the federal funds rate will be smaller, and that's pulling the normal funds rate down."

The Fed has kept its key rate near zero since late 2008 to battle the recession, helping create an unprecedented period of low borrowing costs across the world's largest economy.

Lockhart said quicker growth should be a key variable for the Fed raising its key rate.

"If that progress fails to materialize, a later lift-off date than I am assuming will likely be appropriate," he said.

(Additional reporting by Jason Lange in Washington; Editing by Meredith Mazzilli)