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Fed aims to hike rates, based on more growth and fiscal stimulus: Dudley

Thursday, February 16, 2017 - 10:22

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The Federal Reserve aims to raise US interest rates in the months ahead as long as the economy continues to grow a bit above its trend and if, as expected, fiscal policies provide a boost, an influential Fed policymaker said on Wednesday.

[NEW YORK] The Federal Reserve aims to raise US interest rates in the months ahead as long as the economy continues to grow a bit above its trend and if, as expected, fiscal policies provide a boost, an influential Fed policymaker said on Wednesday.

The comments by New York Fed President William Dudley, a close ally of Fed Chair Janet Yellen, reinforced the central bank's cautious optimism that President Donald Trump and the Republican-controlled Congress would not derail plans for gradual rate hikes in the months and years ahead.

"We expect to gradually remove further monetary policy accommodation and snug up interest rates a little bit further in the months ahead" if the pace of US economic growth runs just above 2 per cent, inflation continues to rise, and unemployment remains low, Mr Dudley told an audience of Cornell College of Business students and graduates.

Little detail on which policies the new government will pursue make it "really hard to factor into your forecast," Mr Dudley said. Uncertainty has risen since the November election, Mr Dudley added, noting that immigration and free trade - areas Mr Trump aims to reform - generally benefit the economy.

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Even so, "We're probably going to get some fiscal stimulus at some point, so that is just another factor that tilts the risks to the economy a little to the upside," said Mr Dudley, who is a permanent voter on US monetary policy.

Forecasts from Fed officials suggest three rate hikes are expected this year, at which point they could consider to begin trimming the US$4.5-trillion portfolio of bonds the central bank amassed in the wake of the financial crisis.

Asked about this timing, Mr Dudley said he would want to delay shrinking the portfolio until he is more confident that rate cuts would not be needed.

"To the extent that we do decide at some point in the future to taper or end reinvestments (of maturing bonds), that will also be a way of removing accommodation, so that will be a bit of a substitute for raising short term interest rates," he said.

"So ... that might actually stretch out the process of" rate hikes, he added.

REUTERS

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