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Dudley Says Fed to Maintain Gradual Tightening; Evans Is Wary

New York Fed chief sees prices converging toward 2% goal

Dudley Says Fed to Maintain Gradual Tightening; Evans Is Wary
Janet Yellen, chair of the U.S. Federal Reserve, center, is introduced by William Dudley, president and chief executive officer of the Federal Reserve Bank of New York, right, before a speech to the Economic Club of New York. (Photographer: Michael Nagle/Bloomberg)

(Bloomberg) -- Two Federal Reserve officials offered different views on the inflation outlook on Monday, as the central bank begins to debate whether to raise interest rates again this year or wait for price pressures to pick up.

Laying out the case for sticking with the Fed’s strategy of gradual monetary policy tightening, New York Fed President William Dudley that with firmer import prices and the “fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the FOMC’s 2 percent objective.”

That echoed remarks last week by Chair Janet Yellen after officials voted to gradually start shrinking the Fed’s balance sheet in October. Yellen speaks again Tuesday in Cleveland, where she’s scheduled to deliver a speech on “Inflation, Uncertainty, and Monetary Policy.”

Dudley Says Fed to Maintain Gradual Tightening; Evans Is Wary

Having announced the gradual unwind of their $4.5 trillion balance sheet, Fed officials are now focused on whether inflation will firm enough for them to raise interest rates a third time in 2017, as their forecasts show they expect. Price pressures have remained below target for most of the last five years, even as the U.S. unemployment rate has fallen.

Dudley “used this speech to once again highlight the Federal Reserve’s baseline outlook” for further gradual rate hikes, UniCredit Bank AG Chief U.S. Economist Harm Bandholz wrote in a note to clients. “That is all consistent with another rate hike in December.”

Investors see a roughly 60 percent chance that the rate-setting Federal Open Market Committee will hike again in December following moves in March and June.

Chicago Fed President Charles Evans, who has repeatedly spoken out in favor of slowing rate hikes to make sure that inflation reaches its target in a lasting manner, offered a more cautious perspective on Monday.

Speaking in Grand Rapids, Michigan, Evans said that he was “broadly comfortable” with the median estimate of the Fed’s latest quarterly projections, which showed its benchmark policy rate ending 2019 at 2.7 percent.

Pressure Points

“However, my views about this path are not set in stone,” Evans said. “As the FOMC comes to decision points over the coming months, I think we need to see clear signs of building wage and price pressures before taking the next step in removing accommodation.”

While Evans viewed U.S. economic fundamentals as sound and the country near full employment at an August jobless rate of 4.4 percent, he was concerned by a decline in inflation expectations which could make it harder for the Fed to hit its 2 percent goal.

Despite progress in the labor market, inflation has been disappointingly weak. After briefly poking above the Fed’s target earlier this year, the annual rise in the personal consumption expenditures price index slowed to 1.4 percent in June and July.

Evans said that it would take “a couple more months of data” before officials could confidently conclude the inflation weakness would not endure.

“I’m a little nervous that some of the recent weakness might be a little more structural,” he told reporters after the speech. “I think technology is changing, the nature of competition is changing, and it’s just not obvious to me that this is such a transitory event that it’s going to pop back up. But it could.”

To contact the reporters on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net, Matthew Boesler in New York at mboesler1@bloomberg.net.

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Scott Lanman