REPEAT: MNI ANALYSIS: Fed's Dudley Sees No Rush to Raise Rates

--Also Raises Estimate of R-Star on Fiscal Policy, Fin'l Conditions

By Sara Haire

     WASHINGTON (MNI) - Federal Reserve Bank of New York President Bill Dudley

on Wednesday laid out reasons why the central bank does not need to pick up the

pace of tightening this year, even as he revised higher his estimate of the

so-called natural rate of interest, meaning policy may actually be a tad more

accommodative than thought. 

     "Financial conditions are still easy and fiscal policy will likely be quite

stimulative in 2018 and 2019," supporting a rising real neutral rate over the

medium term to around 1%, implying a 3% fed funds rate, he said. 

     But while it is important to get monetary policy back to a neutral setting

before the labor market becomes so tight that wage gains and inflation

accelerate past the Fed's 2% target, "the case for tightening policy more

aggressively does not seem compelling," he said. 

     Inflation continues to hover below the Fed's 2% objective, while the labor

market potentially has more slack than the very low jobless rate of 4.1% might

imply, he said. The labor force participation rate has flattened despite the

ongoing aging of the workforce population, suggesting more people are continuing

to look for employment, he said. 

     Meanwhile, Dudley remains confident about the economic outlook, attributing

a slowdown in consumption in recent months to "transitory factors." As the

fiscal stimulus from the tax cuts seeps into household and corporate pockets,

Dudley suggests this will "support further gains in consumption and capital

spending."

     "A gradual path of interest rate increases remains appropriate," he said. 

     A shift toward a more aggressive posture on trade as well as implementing

stimulative fiscal policy at a time when the economy is already running above

trend adds uncertainty to the Fed's assessment of a "neutral policy stance" and

also increases the "possibility that the FOMC will have to move to a restrictive

stance," he said.

     On the one hand, tougher bargaining on trade could lead to revised trade

agreements that provide the United States with greater access to foreign markets

and better protection of intellectual property, which "would tend to raise U.S.

productivity and real GDP growth." 

     On the other hand, it could lead to retaliation and higher trade barriers,

Dudley said. That could result in "higher inflation, lower productivity, and

slower potential GDP growth," he said, but stopped short of suggesting how the

Fed might respond to such a negative combination. 

     Looking further into the future, Dudley argued that changing to a target

range for inflation may better serve the Fed's goal than using a point target,

though he stressed that such a change should not be made before the current

target is met. 

     Evaluating the notion of a range of "perhaps 1.5% to 2.5% versus a point

target of 2.0%," may be more practical, he suggested. "The idea being that

inflation will fluctuate regardless of policy decisions and is likely to remain

stationary at 2.0%."

     A narrow range also would indicate the FOMC inflation concerns would be low

when within the range and high when operating outside the range, he said. 

     But given that inflation has fallen short of the symmetric objective,

shifting to a range now would potentially imply "a greater tolerance for missing

inflation to the low side in an asymmetric way," Dudley said, encouraging to

hold off on shifting to a range until the FOMC has met the objective.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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