Fed's Dudley: Need to Raise Rates Gradually Despite Infl Miss

--Does Not Directly Comment on Sept Jobs Report

--Tightening Labor Market Will Support Wage Growth Over Time

--Rates Trajectory Shallow Due to Lower Neutral Rate

By Jean Yung

     WASHINGTON (MNI) - Bank of New York President Bill Dudley on Friday called

on the U.S. central bank to continue its gradual pace of interest rate increases

in spite of inflation failing to hit its target, saying the fundamentals of the

economy are solid and will support price rises over time.  

     "Even though inflation is currently somewhat below our longer-run

objective, I judge that it is still appropriate to continue to remove monetary

policy accommodation gradually," Dudley said in remarks prepared for a financial

literacy and economic education conference in Brooklyn, N.Y. 

     Further supporting his conclusion is "the fact that financial conditions

have eased, rather than tightened, even as the FOMC has raised its short-term

interest rate target range by 75 basis points since last December," Dudley said.

     Though he has been surprised by inflation staying persistently short of

target, and wonder if some structural shifts may be to blame, Dudley said he

remains confident inflation will rise over the medium term. 

     Slightly above-trend growth is gradually tightening the U.S. labor market,

"which should support a rise in wage growth over time," he said. Higher wages,

combined with firmer import prices partly due to a weaker dollar and "the fading

of effects from a number of temporary, idiosyncratic factors," should support

price levels.

     The New York Fed chief did not directly comment on Friday's jobs report,

which showed the economy lost 33,000 jobs in September likely as a result of

hurricanes shutting businesses in Texas and Florida, but said storm-related

effects "are likely to be relatively modest in the context of the national

economy" and will eventually lift activity once the recovery and reconstruction

efforts get underway.

     The effects "will make interpreting near-term economic data releases more

difficult," he said, but "the economy remains on a trajectory of slightly

above-trend growth at about 2 percent, and the fundamentals supporting continued

expansion are generally quite favorable." 

     The unemployment rate falling from 10% at the height of the recession to

4.2% in September and other indicators of strong labor market conditions will

improve household income and support consumer spending in coming quarters,

Dudley said. 

     Over the long run, Dudley said, "the upward trajectory of the policy rate

path should continue to be shallow" in part because the so-called neutral fed

funds rate is likely lower than it was in prior business cycles. 

     That rate, the level of which keeps the economy growing at its longer run

trend pace and inflation stable, has fallen to around 2.75%, the Federal Open

Market Committee estimated last month. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com