Dudley Doesn't See `Compelling' Case for Faster Fed Rate Hikes

(Bloomberg) -- Strong economic growth and higher inflation don’t necessarily mean Federal Reserve officials should speed up interest-rate increases, New York Fed President William Dudley said.

“Even though the unemployment rate is low, inflation remains below our 2 percent objective. As long as that is true, the case for tightening policy more aggressively does not seem compelling,” Dudley said Wednesday in remarks prepared for a speech in the Bronx.

“My conclusion is reinforced by the fact that we do not know with much precision how low the unemployment rate can go without prompting a significant rise in inflation,” he said.

Dudley, who is retiring in June and will be succeeded by San Francisco Fed President John Williams, said although the Fed won’t necessarily have to quicken tightening, interest rates may need to ultimately be raised to higher levels than previously envisioned.

The so-called neutral rate, which Fed officials say will keep inflation steady, is probably 3 percent, Dudley said. Projections released following the mid-March meeting of the U.S. central bank’s policy-setting Federal Open Market Committee showed that the median committee participant’s estimate of the neutral rate was somewhere in the range of 2.75 percent to 3 percent.

Some Distance

“Although that is higher than the estimates from some models, I have nudged up my estimate because financial conditions are still easy and fiscal policy will likely be quite stimulative in 2018 and 2019,” which means “there is still some distance to go before monetary policy actually gets tight,” Dudley said.

The March projections, which were accompanied by a rate hike, showed most FOMC participants thought it would be appropriate to raise rates two or three more times this year. Investors see two more increases in 2018 as the most likely outcome, according to interest-rate futures, though the market-implied probability of more hikes than that rose Wednesday to roughly one in three, marking a new high.

“I anticipate that the economy will continue to grow at an above-trend pace in 2018 and 2019, which will put sufficient pressure on the nation’s resources to push up inflation to the FOMC’s longer-run 2 percent objective,” Dudley said.

Even so, the outgoing central banker highlighted reasons to doubt a rapid increase in prices.

“The U.S. labor market may have more slack than the 4.1 percent unemployment rate suggests,” he said. “Because the U.S. labor force participation rate for prime age workers is low compared to many advanced economies, the labor market could conceivably improve even further before encountering significant resource constraints.”

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

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Alister Bull

©2018 Bloomberg L.P.