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--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
"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: firstname.lastname@example.org