Janet Yellen, chair of the U.S. Federal Reserve, center, is escorted by Senator Sherrod Brown, a Democrat from Ohio and the ranking member of the Senate Banking Committee, left, and Senator Richard Shelby, a Republican from Alabama and chairman of the committee, right, as she arrives to give her semiannual report on the economy to the committee in Washington, D.C., U.S. (Photographer: Drew Angerer/Bloomberg)

Fed Officials Eyeing Rate Hike See Path Tied to Fiscal Policies

(Bloomberg) -- Three U.S. central bankers speaking on Monday left little doubt that they favor interest rate increases, though they indicated the pace of monetary tightening is uncertain amid questions about the impact of President-elect Donald Trump’s fiscal policies.

Speaking just before they enter a quiet period on Tuesday ahead of their Dec. 13-14 meeting in Washington, Federal Reserve Bank of New York President William Dudley and his Chicago and St. Louis counterparts Charles Evans and James Bullard said at separate events that they’re close to achieving their dual mandate of full employment and 2 percent inflation.

While that underscores expectations the Fed will lift its benchmark lending rate by 25 basis points next week to a range of 0.5 percent to 0.75 percent, the three cautioned that it’s too soon to estimate how Trump’s plans to reduce regulations, cut taxes and increase infrastructure spending will impact their economic outlook. The median estimate of analysts surveyed by Bloomberg is for the upper bound of the federal funds rate to reach 1.25 percent by the end of 2017.

“Assuming the economy stays on this trajectory, I would favor making monetary policy somewhat less accommodative over time by gradually pushing up the level of short-term interest rates,” Dudley said at an event in New York. He later said “there is still considerable uncertainty about how fiscal policy will evolve over the next few years,” adding that he will update his forecasts as the picture comes into focus.

He noted that financial market conditions have tightened since the presidential election, saying that may reflect expectations that new fiscal policies will prompt the Federal Open Market Committee to raise interest rates at a faster clip.

“If fiscal policy were to turn more expansive and that would lend support to economic activity, then probably the Federal Reserve would probably remove accommodation a little bit more quickly over time,” he said later in the day in an interview with CNBC.

Fed Officials Eyeing Rate Hike See Path Tied to Fiscal Policies

Evans, the Chicago Fed president, told reporters following a talk in Chicago that policies under discussion by the incoming administration could help reinforce economic growth.

“It’s still early to have a good idea of what fiscal policies and other events are going to mean for the outlook,” he said.

“At 4.6 percent unemployment and an expectation that the economy will continue to be strong, you don’t need explicit stimulus” from the government, according to Evans.

Speaking to reporters in Arizona, Bullard cautioned that the economic impact of new fiscal policies probably wouldn’t be felt right away. The St. Louis Fed president recommended the type of fiscal policy that would boost productivity.

“I don’t think the outlook for the economy has changed all that much,” Bullard said. “We’re still projecting 2 percent growth for 2017, as I said, stable unemployment at a low level, and inflation returning back toward 2 percent.”

“New policies could have an impact -- more likely in 2018,” he added.