A US central banker says the Federal Reserve should take steps toward raising rates by mid-year to avoid overstimulating the economy, which continues to show signs of strength.
San Francisco Fed president John Williams, who is a voting member of the US central bank's policymaking arm, says it would be appropriate to start weighing the pros and cons of raising rates at the middle of 2015.
"Assuming that things unfold along the lines I've forecast, I think that by mid-year it will be the time to have a discussion about starting to raise rates," Dr Williams told the Australian Business Economists in Sydney on Tuesday, via videolink from the US.
Emphasising that the Fed's decisions were data-driven, Dr Williams said the figures suggested the US economy was "looking downright good".
The economy was on track to reach maximum employment by the end of 2015, if not sooner, while inflation was set to reach its two per cent target in about two years, he said.
Although plummeting oil prices and the stronger US dollar were weighing on inflation in the short term, they would not have much impact further down the road, he said.
Given the economy was headed in the right direction, and that monetary policy usually took a year or two to have its effect, Dr Williams said, the US Fed should start slowly easing off the monetary policy gas, to avoid overshooting later on.
It was safer to start raising rates earlier, and proceed slowly, he said.
"When you're driving towards a stoplight, you don't keep your foot on the accelerator; you ease off so you're ready to stop at your target," Dr Williams said.
"Otherwise, you slam on the brakes and probably wind up in the middle of the intersection.
"By waiting until we're face-to-face with two per cent inflation, we could drastically overshoot the mark, winding up in that metaphorical intersection or even fully running the red light.
"The data convince me that the time is coming when we'll be making our first steps down the road to normalisation."
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