Stressing that data will determine when the Federal Open Market Committee will start the normalization process by raising rates, Federal Reserve Bank of New York President and Chief Executive Officer William C. Dudley said Monday, "hopefully, the data support a decision to lift off later this year."
Basically, he said, the Fed is watching inflation and labor data, and while employment has "improved substantially" in the past few years, inflation has not. Dudley said, "I expect to see inflation begin to firm later this year. If this labor market improvement continues and the FOMC is reasonably confident that inflation will move back to our 2 percent objective over the medium term, then it would be appropriate to begin to normalize interest rates."
Liftoff will not make monetary policy tight, Dudley reminded. "Rather, we will simply be moving from an extremely accommodative monetary policy to one that is only slightly less so. I would view this as a positive signal about the progress we have made in restoring the U.S. economy to health. It is important to remember that near zero short-term interest rates and the large expansion of the Federal Reserve's balance sheet were designed to be a temporary extraordinary treatment to help the economy regain its vitality, and not a permanent palliative."
Dudley estimated rates would need to go to 3.5% eventually. "My current thinking is that the long-run nominal federal funds rate consistent with 2 percent inflation is somewhat lower than in the past," he said. "My point estimate is 3½ percent, but I place considerable uncertainty on this estimate."
