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REPEAT:NY Fed Dudley:US To Grow At 'Slightly Above-Trend Pace'

Repeats Story Initially Transmitted at 23:00 GMT Sep 7/19:00 EST Sep 7
--Fed Likely To Continue To Normalize Policy Gradually
--Normalized Bal Sheet Of $2.4-$3.5 Trn Seen In Early 2020s
--Hurricane Harvey Won't 'Fundamentally Alter" Underlying Trajectory of US Econ'
By Vicki Schmelzer
     NEW YORK (MNI) - The U.S. economy is likely to continue to grow at a
"slightly above-trend pace," underpinned by favorable fundamentals, such as "low
unemployment, sturdy job gains, and rising wages," said New York President
William Dudley Thursday. 
     As long as the upbeat economic trend continues, "the Fed will likely
continue to remove monetary policy accommodation gradually," he said in a speech
to the Money Marketeers of New York University at the Downtown Association in
New York City. 
     Nevertheless, "the upward trajectory of the policy rate path should
continue to be shallow, in part because the level of short-term interest rates
consistent with keeping the economy on a sustainable long-run growth path is
likely to be considerably lower than it was in prior business cycles," Dudley
said. 
     As the Fed begins to normalize the balance sheet - this also "should exert
some monetary policy restraint over time," although this should have a "quite
modest" impact, he said. 
     Financial conditions play a key role in monetary policy, he said. 
     "All else equal, an easing of financial conditions may warrant a somewhat
steeper policy rate path; conversely, if financial conditions were to tighten
unduly, then this might necessitate a shallower rate path to temper that
tightening," Dudley said. 
     Regarding Fed balance sheet normalization, New York Fed staff projections
see the central bank's balance sheet, currently at $4.5 trillion, shrinking by
about $1 trillion to $2 trillion, which "compares to an increase of about $3.7
trillion in the wake of the financial crisis," he said. 
     As for how long balance sheet reduction will last, "assuming that this
process begins later this year and continues uninterrupted, the balance sheet
would likely normalize in the early part of the next decade," he said.  
     He reiterated his leaning towards the Fed's use of a "floor-type" system,
"in which the Fed maintains a relatively abundant supply of reserves and the
effective federal funds rate it managed by periodic adjustments to the interest
rate the Fed pays on bank reserves."
     This is in contrast to the "corridor" system, where reserves "are
relatively scarce and the effective federal funds rate is managed by frequently
adjusting the supply of reserves to meet demand at the desired federal funds
rate level." 
     On the inflation front, Dudley outlined some of the potentially "one-off"
factors that have weighed on prices recently, "such as the sharp fall in prices
for cellular phone service" and the "increased ability" of shoppers to compare
prices. 
     "If it turns out that structural changes have played a significant role,"
Dudley would view this "as a positive rather than negative, development" as it
would "imply that the U.S. economy could operate at a higher level of resource
utilization without generating a troublesome rise in inflation."
     On Hurricane Harvey's devastating effect on Texas and other states, the
storm will make it difficult to assess economic data in coming months, he said. 
     However, aside from the Texas economy which was hard hit," Harvey should
not "fundamentally alter the underlying trajectory of the national economy," he
said.
     As for the Fed being being more or less predictable in its actions, Dudley
said, "there are plenty of potential surprises from the economic environment
without the Fed seeking to deliberately generate its own." He saw little benefit
in the Fed "artificially adding 'noise'."
--MNI New York Bureau; tel: +1 212-669-6438; email: vicki.schmelzer@marketnews.com

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