Tags: rates | Fed | Dudley | tightening

Dudley Sees 'Relatively Slow' Tightening Pace Once Rates Rise

Tuesday, 20 May 2014 01:12 PM

Federal Reserve Bank of New York President William Dudley said the pace of eventual rate increases “will probably be relatively slow,” depending on the economy’s progress and how financial markets react.

“If the response of financial conditions to tightening is very mild, say similar to how the bond and equity markets have responded to the tapering of asset purchases since last December, this might encourage a somewhat faster pace,” Dudley said to the New York Association for Business Economics. “If bond yields were to move sharply higher, as was the case last spring, then a more cautious approach might be warranted.”

Dudley presented a detailed outline of his thoughts on the economy, monetary policy and the exit strategy, views he is likely to bring to the June 17-18 meeting of the Federal Open Market Committee, the Fed panel that sets interest rates.

Fed officials in April trimmed stimulus for the fourth consecutive meeting, saying the economy has strengthened after harsh winter weather slowed growth to a 0.1 percent annual pace in the first quarter. Policy makers cut monthly bond purchases, aimed at holding down long-term interest rates and fueling growth, by $10 billion to $45 billion.

Dudley said he expects growth to pick up for the remainder of this year and next, gradually lifting the Fed’s inflation benchmark closer to its 2 percent target. Under that scenario, he said, he would continue to favor a gradual reduction in asset purchases.

The New York Fed president said the 2 percent inflation goal “is definitely not a ceiling.”

Maximum Employment

“If inflation were to drift above 2 percent, all else equal, then we would tend to resist such a rise,” Dudley said. “But, if inflation were slightly above 2 percent even as unemployment remained far above levels consistent with maximum employment, then the unemployment consideration would dominate because we would be further from the unemployment objective than we are from the inflation objective.”

Fed Chair Janet Yellen said in May 7 congressional testimony that the central bank will probably end bond buying in the fall if the labor market continues to improve. U.S. payrolls rose last month by 288,000 in the biggest gain in two years, and the 6.3 percent jobless rate was the lowest since September 2008, according to a May 2 Labor Department report.

Still, Yellen said “a high degree of monetary accommodation remains warranted” with indicators for inflation and employment far from the central bank’s goals.

On the exit strategy, Dudley said ending reinvestment of maturing assets prior to the first rate increase “may not be the best strategy.”

Regaining Flexibility

First, it could complicate communications about when the committee intended to raise interest rates, he said. Second, he added, the Fed panel should be focused on getting off near zero interest rates “in order to regain some monetary policy flexibility.”

Policy makers have been considering ways to tie up excess liquidity when they decide to tighten monetary policy. Such tools, under the purview of the Fed Board, include the Term Deposit Facility, in which the Fed pays banks a premium on their funds in exchange for leaving their money in the facility, and interest on excess reserves, or the amount the Fed pays banks for money deposited at the central bank.

The Fed since September has experimented with an overnight, fixed-rate reverse-repurchase program to drain cash from the banking system. In a reverse repo, the central bank lends securities for cash for a set period. At maturity, the securities are returned to the Fed, and the cash to primary dealers. The FOMC oversees the reverse repo program.

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Federal Reserve Bank of New York President William Dudley said the pace of eventual rate increases "will probably be relatively slow," depending on the economy's progress and how financial markets react.
rates, Fed, Dudley, tightening
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2014-12-20
Tuesday, 20 May 2014 01:12 PM
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