U.S. central bankers are still likely to start raising interest rates this year if the labor market improves further, though the jobs outlook has become more uncertain, said William C. Dudley, president of the Federal Reserve Bank of New York.
“If the labor market continues to improve and inflation expectations remain well-anchored, then I would expect — in the absence of some dark cloud gathering over the growth outlook — to support a decision to begin normalizing monetary policy later this year,” Dudley, who has a permanent vote on the policy-setting Federal Open Market Committee, said in remarks prepared for a speech Friday in Minneapolis.
At the same time, he cautioned that “there remains some uncertainty about whether growth will be strong enough to lead to further improvement in the labor market.” He also stressed that interest rates are likely to rise gradually after liftoff.
Dudley spoke hours after the Labor Department reported that employers added more jobs to payrolls than forecast. The dollar strengthened as investors increased bets that the Fed will raise rates in September.
Fed Chair Janet Yellen and her colleagues are trying to determine if economic weakness at the start of the year is transitory or longer-lasting, as they consider the timing of their first rate rise since 2006. Fed officials next meet to discuss policy on June 16-17, and Yellen will hold a press conference after the gathering.
Employers added 280,000 workers to non-farm payrolls in May, beating the median forecast in a Bloomberg survey, figures from the Labor Department showed Friday in Washington.
Dudley acknowledged the numbers in his speech, adding that “there is still some ways to go.”
He said he is “becoming more confident” in the inflation outlook as oil prices have stabilized and the pace of appreciation of the dollar has slowed.
That too, however, depends on how the labor market evolves, he said. And even if the labor market does continue to improve, that by itself may not be sufficient.
“For example, if labor market improvement were not accompanied by a meaningful uptick in wage compensation and if inflation expectations also fell, then one likely would not be reasonably confident about inflation returning to 2 percent over the medium term,” he said.
Yellen said on May 22 that she still expects to raise rates this year if the economy meets her forecasts. Those remarks were before government data showed the economy shrank by 0.7 percent at an annual rate in the first quarter.
Governors Lael Brainard and Daniel Tarullo earlier this week both questioned whether the first-quarter slump could be written off as due largely to temporary headwinds. The International Monetary Fund on Thursday cut its U.S. growth forecast for this year and urged the Fed to delay a rate increase to the first half of 2016.
Once the Fed has begun raising rates, it must also decide at what pace to slim down its balance sheet, which it more than quadrupled in size to $4.47 trillion during three rounds of bond buying aimed at holding down borrowing costs.
Answering questions from reporters after his speech, Dudley said he would like the Fed to have raised rates to a “reasonable level” before ending the reinvestment of maturing securities, which he said would amount to additional “tightening of monetary policy.” Some $215.5 billion of the Fed’s holdings mature in 2016. “But how far that is — you know, if it’s 1 percent, or 1.5 percent — I haven’t really reached any definitive conclusion.”