The Federal Reserve is "likely" to start raising interest rates gradually early next year and should begin shrinking its massive balance sheet in October to signal its confidence in the recovery, a top Fed official said on Wednesday.
"Now, I may be more confident that the economy is improving than some of my colleagues, but it's pretty hard to refute the data right now," Dallas Fed President Richard Fisher told reporters after a speech at the University of Southern California. "And then once we are really sure... as I said, it's like duck-hunting, you have to shoot ahead of the mallard, you don't shoot where it is...that's when we talk about rates and short-term rates."
If the jobless rate continues to fall faster than expected and inflation to rise back to the Fed's 2-percent target, the Fed could raise rates even sooner, he said. The unemployment rate registered 6.1 percent in June, and many economists believe it has room to fall only to about 5.5 percent before unwanted inflationary pressures could begin to build.
Fisher is a voting member of the Fed's policy-setting panel this year, and himself acknowledges his views are "at odds" with those of many of his colleagues. He said he will push his views hard in upcoming policy-setting meetings, the next of which will take place in Washington in late July. Fisher, who is 65, faces mandatory retirement by next spring.
The Fed already plans to stop its bond-buying stimulus in October, but has said it then expects to wait a "considerable time" before raising rates in order to avoid short-circuiting what has been a very slow recovery.
Many Fed officials, wary of any move that could send market rates higher before the economy is ready, want to continue to top up the U.S. central bank's $4.3-trillion balance sheet by reinvesting the proceeds of maturing bonds until or even after rate hikes begin.
Fisher said he personally believes markets will adjust to the Fed's signals "gently," and if they don't, the Fed can adjust its stance.
"We have to be careful that we don't let markets bully the central bank," he said.
The Fed has kept interest rates near zero since December 2008 and has bought trillions of dollars of bonds to push down long-term borrowing costs and boost the economy.
Fisher has long opposed the bond-buying, but this year has not dissented from the majority of his colleagues who support it because they have gradually been winding the program down.
But given that the Fed is nearer to its goals than many appreciate, Fisher said, "the notion that 'we can always tighten' if it turns out that the economy is stronger than we thought it would be or that we've overshot full employment is dangerous."
Instead, he urged, the Fed should "dilute the punch" of easy monetary policy.