- Dudley marked down growth forecast only 'very modestly' so far
- Downside risks have risen and could trigger larger downgrade
Federal Reserve Bank of New York President William Dudley said that while he still expects inflation to reach the U.S. central bank’s 2 percent target over time, he’s lost some confidence in that prediction, adding his voice to the concern expressed by several other policy makers.
“On balance, I am somewhat less confident than I was before,” Dudley, the vice chairman of the policy-setting Federal Open Market Committee, said Tuesday in the Chinese city of Hangzhou. “Partly, this reflects my assessment that uncertainty to the outlook has increased and that downside risks have crept up.”
Economists said the remarks from a senior Fed policy maker were striking because he focused on downside risks rather than the encouraging rise in U.S. price pressures in January. Dudley’s views added to officials’ concerns expressed recently about growth and inflation headwinds from abroad.
“We’ve heard from several sources now on the committee that they are becoming more concerned about this,” said Michael Gapen, chief U.S. economist at Barclays Plc in New York. “It reinforces the idea that the Fed is likely to go more gradually than they have projected in their own dot chart,” he said.
The FOMC next meets March 15-16, when officials will update the economic forecasts that they submitted in December, including the so-called “dot plot” -- projections for what they view as the appropriate pace for raising rates over the next few years. In December, policy makers’ dots signaled they expected four rate hikes this year.
Investors see only a 10 percent probability that the Fed will lift borrowing costs again at the upcoming meeting, according to pricing in interest-rate futures markets, down from 50 percent at the end of last year, after global financial market turmoil spurred by doubts over Chinese growth increased bets the Fed would delay policy tightening.
Dudley was speaking at a rare joint conference with the People’s Bank of China. At the same venue, PBOC Deputy Governor Chen Yulu warned that a strengthening dollar could fuel a crisis in emerging markets, and said the central banks of the world’s top two economies should work more closely to counter a trend of weakening global economic policy coordination.
His comments follow a warning from Fed Governor Lael Brainard about spillovers from weaker growth abroad and from St. Louis Fed chief James Bullard, a voter this year on the FOMC, who highlighted his concern about the decline in market-based measures of inflation expectations.
Dudley in his prepared remarks said that “tighter financial conditions abroad do spill back into the U.S. economy, and policy makers must take this into account in their assessment of appropriate monetary policy.” At the same time, market volatility won’t dictate policy decisions, he said.
In December, Fed Chair Janet Yellen and her FOMC colleagues raised their target for the benchmark federal funds rate for the first time in almost a decade, after keeping it near zero since late 2008. That decision was justified by committee projections that growth would be strong enough to continue pushing down unemployment, putting upward pressure on inflation, which has been under the Fed’s 2 percent target since 2012.
The New York Fed chief said he has so far marked down his forecast for U.S. economic growth this year “very modestly,” and still believes it will average around 2 percent, enough to continue reducing labor-market slack and stoke inflation. Transitory factors, including warm weather and inventory adjustments, caused growth to slow in the final three months of 2015, but probably won’t hold it down going forward, he said.
Although Dudley said his “overall outlook has not changed substantially,” downside risks have increased, and could trigger revisions to the outlook if they continue. He flagged declines in market-based measures of inflation expectations as well as those derived from consumer surveys as “concerning,” and added that internal Fed models assigned greater odds to the economy disappointing policy makers’ projections than exceeding them.
Balance of Risks
“At this moment, I judge that the balance of risks to my growth and inflation outlooks may be starting to tilt slightly to the downside,” Dudley said. “The recent tightening of financial market conditions could have a greater negative impact on the U.S. economy should this tightening prove persistent.”
The S&P 500 Index of U.S. stocks has fallen more than 4 percent since the start of the year and the yield on 10-year U.S. Treasury notes has declined by around 0.45 percentage point amid concerns over a slowdown in global growth.
Emerging markets are on the Fed’s radar screen, and developments there will play into the FOMC’s future decisions on interest rate changes, Dudley said.
“Of course, this does not mean that we will let market volatility dictate our policy stance,” he said. “There is no such a thing as a ‘Fed put.’ What we care about is the country’s growth and inflation prospects, and we take financial market developments into consideration only to the extent that they affect the economic outlook.”