Dudley Ties 2015 Liftoff to Outlook as U.S. Economy Softens

  • Says his rate rise call based on his forecast staying on track
  • Dudley: `Recent economic news suggests the economy is slowing'

The U.S. central bank should still raise interest rates this year so long as the economy stays on track, Federal Reserve Bank of New York President William C. Dudley said, cautioning that recent data signal growth may be slowing.

“If the economy performs in line with my forecast, I would favor lifting off later this year. But it’s a forecast. It’s not a commitment,” Dudley told an audience in Washington Thursday, repeating an argument that he used on Friday and noting that “sometimes the forecasts are right, and sometimes the forecasts are wrong.”

Tepid U.S. economic data are clouding the outlook for liftoff this year and Fed governors Lael Brainard and Daniel Tarullo said earlier this week they favored patience on the timing of the first rate increase since 2006.  

Dudley acknowledged that recent data have been subdued, though he said that he “wouldn’t want to make too much out of that,” adding that the domestic economy was performing pretty well, even with headwinds including weaker trade and a second-half drag on growth as companies cut back inventories that are too high.

Economy ‘Slowing’

“The recent economic news suggests the economy is slowing, and we have these developments in China and emerging-market economies that could develop in a way” that could come back and hurt the U.S. economy and inflation, Dudley said.

“When I put it all together, I still see an economy that’s growing a bit above trend. And if that is the case, we should see greater pressure over time on resources. And if that is the case, then we should be able to begin to normalize monetary policy,” he said.

Figures on retail sales, producer prices and inventories released this week all were weaker than forecast, suggesting weakness in inflation and third-quarter growth. Those come on the heels of a September jobs report that fell short of estimates.

Investors have cut to 30 percent the probability of a rate increase by policy makers’ December meeting, according to pricing in the federal funds futures market. That compares to 60 percent a month ago, assuming the effective funds rate is 0.375 percent after liftoff.

“If you tighten prematurely, you risk having to go back down to the zero bound and that raises questions about what do you do at that point. But if you wait too long then you might have to tighten monetary policy aggressively and that would risk a recession,” Dudley said. “Reasonable people can reach different views about which of those risks predominate.”

He was answering audience and moderator questions after discussing monetary policy rules, like the so-called Taylor Rule, at an event at the Brookings Institution. John Taylor, the Stanford University professor who authored the rule, took part in the discussion.

Dudley told Taylor that he thought following a rule could lead officials to make mistakes because they aren’t forward-looking and they don’t incorporate key forces shaping the economy. Taylor argued that his rule was never meant to be followed mechanically.

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