Federal Reserve Bank of New York President William Dudley is optimistic about the near-term economic outlook and the likelihood that the Federal Open Market Committee will be able to make progress this year in pushing inflation up toward its 2% objective.
Dudley’s outlook for 2018 and the near term is “reasonably bright,” he said during a speech at the Securities Industry and Financial Markets Association’s conference on the U.S. economic outlook for 2018 in New York. (Dudley intends to retire form the New York Fed by the middle of this year.)
So, if 2018 looks good, what about the longer term?
“The economy has considerable forward momentum, monetary policy is still accommodative, financial conditions are easy, and fiscal policy is set to provide a boost,” Dudley said. “But there are some significant storm clouds over the longer term.”
In his speech, Dudley discussed two things that he’s not worried about and three things that have him concerned.
Not worried that the economic expansion is in its ninth year.
Dudley said that he does not think the economic expansion is vulnerable just because it is “old.”
“As we like to say, expansions don’t die of old age — they die either because monetary policy needs to be tightened appreciably to combat rising inflation, or because the economy gets hit with a large shock that overwhelms the ability of the Federal Reserve and other policymakers to stabilize it successfully,” he said. “In general, with inflation below the FOMC’s long-run objective, we can be cautious in how we adjust monetary policy.”
Not worried about the recent flattening of the Treasury yield curve.
At the end of 2017, the spread between the 10-year Treasury bond and 2-year Treasury note had narrowed to 52 basis points, from 125 basis points at the start of the year.
While some commentators believe that such a flattening foreshadows a recession, Dudley said that he was not concerned about the recent flattening of the Treasury yield curve.
According to Dudley, “some flattening in the yield curve should be expected as we gradually remove monetary policy accommodation.”
He also notes that it should be expected that the yield curve be flatter than normal in the current environment.
“Not only are bond term premia depressed due to quantitative easing both here and abroad, but the low inflation environment is also likely a contributing factor,” Dudley said.
Slightly worried about financial market asset valuations.