The Federal Reserve’s
policy committee may need to begin raising interest rates for the first
time since 2006, though some slack remains in the labor market, Federal
Reserve Bank of New York President William C. Dudley said Thursday.
“I think it is quite
possible that the conditions the Committee has established to begin to
normalize monetary policy could soon be satisfied,” Dudley said in a
speech in New York. “I will be evaluating the incoming information to
see if it confirms my expectation that growth will be sufficient to
further tighten the U.S. labor market.”
Fed President James
Bullard of St. Louis earlier on Thursday urged the Fed to raise interest
rates from near zero, while Chicago Fed leader Charles Evans stressed
any increases should be “gradual” and rates could be less than 1 percent
at the end of next year. Fed Chair Janet Yellen has told Congress that
the U.S. economy was performing well and that a December rate hike is a
"live possibility."
“The economy looks to
be in decent shape and is likely to continue to grow at a slightly
above-trend pace,” Dudley told the Economic Club of New York. “Spare
labor resources are shrinking. But there still is some risk that the
growth pace could slow as the trade sector acts as a drag on aggregate
economic activity.”
While noting that the
job market has made progress, Dudley said he wasn’t ready to commit to
December, adding that ”we have still not seen compelling evidence” that a
tighter market is leading to greater compensation gains.
A still-elevated
number of part-time workers and discouraged workers suggests the economy
is not at full employment, with slack of an additional quarter point to
half point in an unemployment rate at 5 percent, Dudley said.
“I have greater
concerns because we continue to fall substantially short of our
inflation objective of 2 percent,” and measures of inflation
expectations “are under downward pressure.”
Investors raised the
probabilities of a Fed rate hike in December after a Labor Department
report Friday showed 271,000 jobs were added in October, and the jobless
rate fell to 5 percent.
The Fed faces risks of hiking rates too quickly or too slowly, with those concerns ”nearly balanced,” Dudley said.
Beyond the first rate
increase, the economy will face headwinds including a strong U.S. dollar
and tight mortgage credit, he said.
“After lift-off the upward trajectory of the short-term rates is likely to be quite shallow,” Dudley said.
Source: Bloomberg
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