Fed's Quarles Says Interest Rate Increases May Yet Be Needed

(Bloomberg) -- Federal Reserve Vice Chairman for Supervision Randal Quarles said he’s still upbeat about the U.S. economy and expects additional interest-rate increases may be necessary “at some point.”

Quarles said he supported the Fed’s recent decision to put additional moves on hold following four hikes in 2018, especially after recent data showed growth had slowed.

“That said, I remain optimistic about the outlook for the U.S. economy, and I think that we have the potential to maintain growth at a healthy pace in the years ahead,” Quarles said in the text of a speech he’s scheduled to give Friday in New York.

Fed officials appear to be in agreement over a short-term pledge to keep rates steady as they asses incoming economic data, though they have expressed a range of opinions on the likelihood of getting back on a tightening track.

Quarles joins Boston Fed chief Eric Rosengren as among the more hopeful of policy makers that the economy will maintain its strength. Dallas chief Robert Kaplan, in remarks earlier on Friday, said he had not forecast a rate increase at all this year in projections he submitted for the central bank’s meeting last week, and urged a flexible, patient policy approach.

“How we communicate and explain what those dots mean and why it’s happening puts a real onus on the Fed at inflection points,” Kaplan said at a separate event in New York.

The Fed backed off from earlier projections for increases in 2019 on concerns over faltering growth outside the U.S. and muted inflation.

Weak Numbers

Quarles acknowledged weak readings on retail spending and jobs growth in recent months, but cast doubt on the longer-term reliability of those figures. Employers added 20,000 jobs during the month, the fewest since September 2017, missing all economist estimates and bucking a recent trend of strong February readings.

“As with retail sales, the February payroll number seems a bit odd, especially when measured against the continued strength of the household survey for the same month,” he said.

He also took encouragement from higher investment and productivity figures in 2018.

“It could be that tight labor markets have played a role in boosting labor productivity growth as employers work to increase efficiency as new workers become harder to find,” he said.

Quarles also gave his thinking behind the counter-cyclical capital buffer -- a tool with which the Fed can amplify capital demands in times of elevated market vulnerability. He explained the recent decision by the Fed’s Board of Governors to keep the level at zero, despite 13 other countries raising their marks.

“Taken as a whole, financial system vulnerabilities strike me as being not outside their normal range,” Quarles said. He further explained that the agency’s approach will mean it stays at zero “most of the time.”

The Fed’s decision earlier this month to maintain the buffer at zero came with a dissenting vote from Governor Lael Brainard, who has argued it might be prudent to activate the buffer as cyclical pressures have shown some signs of building.

Quarles did acknowledge Friday that leveraged lending -- the market for high-risk corporate loans that often fund mergers and acquisitions of especially indebted companies -- has been a “locus of concern.”

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