Economist's Insights

Dudley Says Expansion has a Long Way to Go, Expresses Faith in the Phillips Curve

Jun 19, 2017

NY Fed President Dudley didn’t disclose his expectations for future hikes and avoided discussing balance sheet normalization. However, he did strike an optimistic tone on the outlook for the U.S. economy. Dudley remarked, “I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go.” But for that play out, he noted the Fed must not wait too long to tighten in order to avoid having to “slam on the brakes”, potentially pushing the economy into recession. Stating the obvious, he admitted inflation was a little lower than the Fed would like. He partially blames weak productivity for unimpressive wage growth but noted that wages should pick up as the job market continues to tighten. On the four hikes so far during this expansion, Dudley believes the Fed has “gotten the balance roughly right,” dismissing the potentially ominous indications of a flattening yield curve. Instead, he believes it has helped keep financial conditions from tightening too quickly; adding to the gradual nature of the Fed’s removal of accommodation.