Fed’s Tarullo Says Better to Wait on Rates Even Without Brexit

  • He sees remaining slack, little evidence of higher inflation
  • U.S. economy is in ‘gradual recovery,’ not ‘running hot’

Federal Reserve Governor Daniel Tarullo said inflation and unemployment haven’t reached levels that would justify an increase in interest rates, even without risks from Britain’s vote to leave the European Union.

“For nine or 10 months now, some people have said we’re at or close to full employment, yet during that period we’ve created 800,000 or 900,000 jobs,” Tarullo said Wednesday in Washington. “That tells me there was more slack in the economy. That tells me we have the opportunity to create more jobs.”

A Fed governor since 2009, Tarullo, 63, dismissed worries among some economists that a tightening labor market will provoke wage increases that may push inflation too far above the Fed’s 2 percent target. Unemployment fell to 4.7 percent in May, at or very near what most Fed officials see as the lowest sustainable level of unemployment. The central bank’s preferred measure of inflation was 0.9 percent in the 12 months through May. Stripping out food and fuel, the personal consumption expenditures price gauge was up 1.6 percent.

Tarullo, speaking in a question-and-answer session hosted by the Wall Street Journal, emphasized his diagnosis had little to do with the recent shock created by last month’s Brexit vote, even though that’s likely to curb growth in the region.

“I have for some time now, and this is not a Brexit issue, I have thought that it was the better course to wait and see more convincing evidence that inflation is moving toward, and will remain around, the 2 percent target,” he said, referring to his position on raising rates. “I look at this as an opportunity for greater maximum employment in a context in which inflation is not at our stated target, not near our stated target and hasn’t been so in quite some time.”

Evidence Lacking

Asked directly if his remarks meant he wasn’t close to favoring an interest-rate hike, Tarullo said, “I certainly to this point have not seen that kind of evidence.”

Minutes of the Fed’s June 14-15 policy meeting will be released later Wednesday at 2 p.m. in Washington.

“This is not an economy that’s running hot,” he added. “This is an economy that has been moving forward in a gradual recovery, modestly above trend for some time now.”

Tarullo, who heads the Fed’s efforts on banking regulation and supervision, said global financial institutions had weathered the initial shock from Brexit well, though it wasn’t possible yet to gauge its longer-term effects on the economy in the U.K., Europe or the U.S.

“None of us really knows the magnitude of it and I doubt that there will be moment when people will say Brexit is done,” he said.

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