Federal Reserve Bank of New York President William Dudley said factors restraining price pressures should disappear with time, allowing the U.S. central bank to maintain its gradual pace of monetary policy tightening.
Dudley said inflation should pick up with “the fading of effects from a number of temporary, idiosyncratic factors,” stabilizing around the Fed’s 2 percent goal over the medium term.
“In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually,” Dudley, who also serves as vice chairman of the Fed’s policy-setting committee, said in the text of a speech Monday in Syracuse, New York. Most of his prepared remarks focused on the local economy and importance of workforce development.
Policy makers voted last week to begin to gradually unwind the Fed’s $4.5 trillion balance sheet next month. Central bankers are now focused on whether inflation will firm enough for the Fed to raise interest rates a third time this year, as their forecasts show they expect. Price pressures have remained below target for most of the last five years, even as the U.S. unemployment rate has fallen and labor-force participation has stabilized, suggesting that job-market slack has been absorbed.
While some of his colleagues are questioning whether that shortfall is temporary — Dallas Fed President Robert Kaplan said last week that structural factors may be reining in prices, though cyclical tightness could still help the central bank to hit its goal — Dudley’s comments suggest that he believes the recent softness will proved short-lived.
Business fixed-investment is likely to continue to rise, Dudley also said, as a tighter labor market and weaker dollar encourage spending.
“The U.S. economy remains on a trajectory of slightly above-trend growth, which is gradually tightening the U.S. labor market,” he said. “Over time, this should support a rise in wage growth. The fundamentals supporting continued expansion are generally quite favorable.”