Dudley Says Inflation Will ‘Take Some Time’ to Reach Fed's Goal

  • New York Fed chief says low productivity weighs on wage growth
  • High inequality one of America’s most important issues: Dudley

Konstam Sees Inflation Equilibrium Closer to 1 Percent

Federal Reserve Bank of New York President William Dudley cautioned that “it’s going to take some time” for inflation to rise to the central bank’s 2 percent target even as he offered a generally positive outlook for the U.S. economy, job market and price pressures.

“Our outlook anticipates a continued moderate growth trend, with some further strengthening in the labor market and an increase in inflation over the medium term toward our objective of 2 percent,” he said Thursday in prepared remarks at a press briefing in New York on inequality.

That language compares with the policy-setting Federal Open Market Committee’s post-meeting statement on July 26, which said inflation was expected to “stabilize around the Committee’s 2 percent objective over the medium term.”

Dudley, who also serves as vice chairman of the FOMC, later explained to reporters that the year-over-year measures would be constrained by weak readings in recent months.

“I do think I expect inflation to also start to move higher in the medium term but probably not get all the way back to 2 percent on a year-over-year basis, because remember, we’ve had these very weak inflation readings for a number of months,” he said. “So we’re not going to get to a year-over-year number of 2 percent until some of these very low readings drop out of the statistics 6 to 10 months from now.”

Balance Sheet

Fed policy makers are expected to announce when they meet next month that they will begin paring down the U.S. central bank’s $4.5 trillion balance sheet, which they built up after the financial crisis in an effort to stimulate the economy by reducing long-term interest rates. They have raised their benchmark interest rate four times since December 2015, but the chances of another increase this year have fallen to around 40 percent following a string of government reports that showed muted wage and price pressures in recent months.

“People think about inflation typically on a year-over-year basis, and those year-over-year measures are going to be depressed for a while,” Dudley said. “But thinking about it sequentially, we would expect the inflation data to show a little bit more upward pressure than what we’ve seen over the last four months or so.”

Price increases have moderated even as joblessness has fallen below the level Fed officials see as sustainable over the longer run. The Fed’s preferred inflation gauge, the price index for personal consumption expenditures, climbed by only 1.4 percent in the 12 months through June from a year earlier. Policy makers have repeatedly said that they view the slowdown as transitory, though they acknowledged in their July 26 statement that price measures have “declined and are running below” their 2 percent target.

“The story is not a complex one. One, the labor market continues to tighten, so we would expect that to ultimately manifest itself in somewhat higher wages,” said Dudley.

“Two, the dollar, which had been quite firm when looking back a few years ago, now has actually weakened, and so that should have some consequence for import prices,” he added. “Those two things should combine to gradually push inflation up.”

July’s U.S. consumer prices report -- which covers a separate Labor Department gauge -- is scheduled for release at 8:30 a.m. on Friday in Washington. It is expected to show consumer inflation rising to 1.8 percent on a year-over-year basis, versus 1.6 percent in June, according to analysts surveyed by Bloomberg.

The New York Fed chief also called issues of economic inequality and mobility “among the most important that we face as a nation.”

“Currently, we see comparatively high levels of inequality in the labor market in terms of differences in the wages workers earn,” he said in his opening remarks. “Monetary policy can help support economic growth, but it is much less powerful in addressing the structural factors that underpin inequality in the labor market.”

Dudley told reporters the problem could have broad effects on the U.S. economy and that savings would tend to rise if the trend of widening income and wealth inequality continued.

“There’s a higher savings propensity among very high-income people, and so that would probably tend to make the economy a little bit more sluggish on the margin,” he said.

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