Data will likely show a weak first-quarter economy, but, "these downside surprises" are mainly due to "temporary factors," Federal Reserve Bank of New York President William Dudley said Monday.
"Economic performance in this cycle has been disappointing compared to historical patterns," and the first quarter growth may be only 1%, but that "Overall, I view these downside surprises as reflecting temporary factors to a significant degree. For example, some of the recent softness is likely due to yet another harsh winter in the Northeast and the Midwest," he said according to prepared text released by the Fed.
Dudley noted the data will determine the timing of lift-off. "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," he said.
Despite the removal of the term "patient" from the FOMC statement, he said, "does not indicate that we will be 'impatient' to begin to normalize monetary policy. Rather, the timing of normalization will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated."
Also, lift off will only make monetary policy slightly less accommodative, not tight, Dudley emphasized. "It also will be a positive signal about the progress we have made in restoring the economy to health. In my view, it would be a cause for celebration, because it would signal that the FOMC believes that slightly higher short-term interest rates are consistent with its objectives of maximum employment and price stability."
After lift-off, Dudley said, the likely path of short-term rates "will be relatively shallow."
"How fast the normalization process will proceed depends mainly on two factors: how the economy evolves and how financial market conditions respond to movements in the federal funds rate," Dudley said. "If financial market conditions do not tighten much in response to higher short-term interest rates, we might have to move more quickly. After all, the point of raising short-term interest rates is to exert some restraint on financial market conditions. In contrast, if financial conditions tighten unduly, then this will likely cause us to go much more slowly or even to pause for a while. At the end of the day, we will move short-term interest rates to generate the set of financial market conditions that we deem is most consistent with our employment and inflation objectives."
Ultimately, Dudley expects the long-run nominal federal funds rate will be 3.5%, but he warned, "I wouldn't bet the farm on this. I have considerable uncertainty about this estimate."
Dudley also offered his view about Fed reform. The fed is "very transparent and accountable to Congress and to the public," and its independence is "essential." He said the system works and "I do not see a need for any substantive changes."
