Interview: U.S. rate hike more likely to come in September: former Fed chief economist

With market participants' guessing game over a rise in U.S. interest rates intensifying, a leading U.S. economist predicted the first rate hike could come as soon as June, but more likely in September.

"I'm expecting the Fed to start raising interest rates in September of this year. It could come as early as June, it could be a little bit later, but I think the turn is coming," said David Stockton, senior fellow at the Peterson Institute for International Economics and former chief economist for the Federal Reserve Board from 2000 to 2011.

Fed Chair Janet Yellen downplayed inflation concerns and " focused more on the labor market" in her speech on Friday, laying the groundwork for interest rate increases later this year, Stockton told Xinhua in a recent interview.

Yellen "set a very low bar" for what it would require for the central bank to start the tightening cycle, Stockton said, adding that the Fed could start hiking interest rates even with inflation running well below the central bank's target of 2 percent, as long as the labor market continues to improve.

Stockton said the labor market is a more accurate gauge of improvement in the U.S. economy than the gross domestic product figures. Although the U.S. economy recovered from the financial crisis at a slow pace, the labor market is strengthening at a faster clip.

The employment growth has averaged 275,000 per month over the past year and the unemployment rate fell to 5.5 percent in February, the lowest level since May 2008, according to the Labor Department.

Stockton expected the economy to expand roughly the same pace as last year and above its potential rate of growth in the next several quarters, shrugging off weak economic growth in the first quarter of this year, which was attributed to severe cold weather, inventory adjustments and the strengthening dollar.

But the Fed would be cautious in deciding when to start interest rates because of the weak growth in the first quarter. " We are seeing some weakness in the incoming data on economic activity. That could be concerns about whether or not that would stall improvement in the labor market," Stockton said, adding that Yellen signaled a little bit desired to see more data to confirm the improvement of the U.S. economy.

Stockton said Fed officials will make better judgment by September "whether the early part of the year's weakness in the data was just temporary or whether it signaled more serious slowdown."

"That's why I'm expecting September rather than June (for raising interest rates)," he said.

However, Stockton didn't rule out an interest rate hike in June, if there are a few more months of really blockbuster big employment increase accompanied by the decline of unemployment rate, and some signs of picking up in inflation between now and the June policy meeting.

Stockton warned that there's going to be "some considerable market volatility" this year, despite the Fed's best efforts to try to communicate its intention as clearly as possible. "It's just impossible to prevent market from over-reacting" once the Fed starts the tightening cycle, he said.

The Fed has kept benchmark short-term interest rates near zero since December 2008.

Stockton said China is much less exposed and invulnerable to the Fed's tightening policy than many other emerging market economies as the world's second-largest economy has mass foreign exchange reserves. "The bigger challenge for China is to manage its own credit cycle and the real estate market," he said. Endite