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Fed's Dudley Says He Still Favors Another Rate Hike in 2017

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Federal Reserve Bank of New York President William Dudley said it isn’t unreasonable to expect the central bank to announce plans in September to start trimming its balance sheet and said he supports another interest-rate increase this year if the economy evolves as he expects.

“I would expect — I would be in favor of doing another rate hike later this year” if the economy holds up, Dudley said, speaking in an interview with the Associated Press.

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Expectations for a September announcement on when the Fed will begin to wind down its balance sheet weren’t “unreasonable,” he said. A political debate over the debt ceiling is unlikely to have a “big impact” on that timetable because the central bank could announce the start of the program but delay the actual date.

“The plan is out there. It’s been, I think, generally well-received, and fully anticipated,” Dudley said of the outline for drawing down the $4.5 trillion balance sheet. “In the last FOMC statement, we said that we expected this to happen relatively soon. So, I expect it to happen relatively soon.”

Dudley’s comments signal optimism at a time when inflation remains below the Fed’s goal even as the labor market continues to expand and the overall economy is chugging along. The New York Fed chief brushed aside recent weak price data as a trend that will probably reverse, suggesting officials might be willing to look past the slowdown even as it becomes more sustained.

‘Bit Tighter’

“We do expect as the labor market continues to tighten, to see firmer wage gains and that will ultimately filter into inflation moving up towards our 2% objective,” Dudley said. “A pretty broad range of evidence that suggests the labor market is quite a bit tighter than it’s been in many years. Which is a good thing.”

Fed officials have been projecting one more rate increase in 2017, for a total of three this year, but weak price gains have made markets doubt that outlook. Investors are pricing in just a 29% chance of a rate increase by year-end.

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The U.S. has seen an extended run of sub-par inflation prints, the July Consumer Price Index reading showed last week. The Fed’s preferred gauge, which comes out with a longer delay, was running at 1.4% in June — well below the Fed’s 2% goal.

Still, Dudley’s comments jibe with the policy-setting Federal Open Market Committee’s post-meeting statement on July 26, which said price gains were expected to “stabilize around the Committee’s 2% objective over the medium term.” The Fed is scheduled to release minutes from that meeting this week, an account that could give a more textured glimpse into the inflation discussion.

“The jury’s out of whether there is sort of structural, secular changes in place that are holding inflation lower on a sustained basis,” Dudley said. “The next four to six months I think are going to be important to see whether the readings that we’ve had over the last few months are mainly due to one-off factors, such as the big decline that we’ve seen in cellphone prices, or whether there’s something more fundamental going on.”

Wages, Prices

Dudley said if secular forces are pushing inflation lower, it’s possible that the unemployment rate could fall further before it precipitates higher wages and prices.

The jobless rate fell to 4.3% in July, down from 4.7% headed into the year and below policy makers’ estimate of the longer-run sustainable rate. The median official expected U.S. joblessness to average 4.3% in the fourth quarter and hold around 4.6% in the longer term, according to quarterly projections updated in June.

The New York Fed chief also brushed aside concerns about high asset prices, saying he’s “not particularly concerned,” primarily because “asset prices are pretty consistent with what we’re seeing in terms of the actual performance of the economy.” When asked about his impression of White House economic adviser Gary Cohn as Fed chairman, he said “I don’t want to evaluate the various candidates for the Federal Reserve, except to say that I think Gary is a reasonable candidate.”

Dudley, 64, has been President of the New York Fed since 2009 and was formerly chief U.S. economist at Goldman Sachs Group Inc. He holds a Ph.D. in economics from the University of California Berkeley.

—-Read Fitch: Rising Interest Rates Could Hurt, Too on ThinkAdvisor.


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