Central Banks

Thursday, November 12, 2015 - 14:20

Dudley Q&A: Liftoff Shouldn't Wait Til 'Whites of Infl's Eyes'


--Fed Vice Chair: Later, Steeper Liftoff Risks Hard Landing
--Global Economies Look a 'Bit Better' Than a Few Months Ago
--Q4 International GDP Likely to Exceed Q2

NEW YORK (MNI) - A top U.S. Federal Reserve official said Thursday he is opposed to waiting for interest-rate liftoff till policy makers "see the whites of inflation's eyes," arguing that a later, steeper rate move could risk a hard landing for the economy.

"Monetary policy works with a long and variable lag," said William Dudley, president of the Federal Reserve Bank of New York and vice chair of the Fed's policy-setting Open Market Committee, answering a moderator's questions following a luncheon presentation to the Economic Club of New York.

"Personally, I don't favor waiting until I see the whites of inflation's eyes."

Dudley, who while New York Fed president is also a permanent voting member of the FOMC, went on to say that delaying the start of rate tightening and raising by an initial 50 basis points rather than 25, would "risk a hard landing on the other side."

Said Dudley: "I think by going slowly and gradually, the risk that financial markets will react in some very aggressive way that tightens financial conditions in a way that's undesirable will be very much diminished."

He said that "waiting too long ... can be quite problematic," by anchoring inflation expectations to the upside.

"It can be very, very difficult to get that genie back in the bottle," Dudley said. "I think risking that would be very dangerous."

The typically dovish monetary policy maker also told his audience that the global economic outlook, which the Fed "absolutely" considers when mulling monetary policy, has improved over the last few months.

China-related financial market "turbulence has subsided," Dudley said.

"The economic news that we've gotten from abroad ... looks a little bit better than it did a few months ago."

Dudley said it "looks like the fourth quarter for the international economies is actually going to be stronger than the second."

Regarding the strengthening U.S. dollar and its impact on trade flows and U.S. exporters, Dudley said this is one of the FOMC's many considerations as it assesses monetary and financial conditions. He acknowledged that the dollar's appreciation over the past year could have a protracted effect on U.S. trade.

On the domestic front, Dudley reminded that "there are limits to what monetary policy can do to influence the macro economy" and factors like productivity growth.

"That's really for the Congress and the administration."

Asked why business fixed investment has not yet recovered fully, the New York Fed chief said business psychology following the Great Recession probably plays a part, as does sluggish small-business formation.

"Just like the Great Depression weighed on our parents' and grandparents' minds for many, many years, it wouldn't surprise me if the Great Recession is continuing to weigh on businesses."

--MNI New York Bureau; tel: +1 212-669-6430; email: claudia.hirsch@mni-news.com

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