Federal Reserve Bank of New York President William Dudley signaled that he approves of higher interest rates over time as the economy continues to improve, while cautioning that fiscal and monetary policy need to work together to secure the longer-term outlook.
“Assuming the economy stays on this trajectory, I would favor making monetary policy somewhat less accommodative over time by gradually pushing up the level of short-term interest rates,” Dudley said Monday, speaking from a prepared text for delivery in New York. Policymakers gather to discuss interest rates on Dec. 13-14 in Washington, and are widely expected to raise the range for their benchmark short-term lending rate by 25 basis points for the second time in 12 months.
While the U.S. economy is moving toward the Fed’s two goals of maximum employment and 2 percent inflation, Dudley pointed out that the U.S. faces longer-term challenges and urged fiscal policy makers to keep in mind macroeconomic stability. His comments come after Donald Trump’s surprise victory in the Nov. 8 presidential election stoked market expectations for fiscal policy action.
“Economic expansions don’t die of old age, and there appear to be few imbalances in the economy that could lead to the current expansion ending,” Dudley said. “But, in order for this to remain the case, it is important that fiscal policy and monetary policy are well aligned going forward.”
Dudley said it’s important that the U.S. retains “sufficient fiscal capacity so that fiscal policy can support the economy when the next cyclical downturn does occur.”