Economist's Insights

Dudley Expects Gradual Rate Hikes to Continue

Apr 19, 2018

With two months left in his tenure, NY Fed President said gradual rate increases continued to be the appropriate in order to return the Fed Funds rate to neutral and ensure price stability. Dudley disclosed he has the neutral rate pegged near 3% and explained that while “that is higher than the estimates from some models, I have nudged up my estimate because financial conditions are still easy and fiscal policy will likely be quite stimulative in 2018 and 2019, …there is still some distance to go before monetary policy actually gets tight.” But he acknowledged that a gradual path is enough, saying “Even though the unemployment rate is low, inflation remains below our 2 percent objective. As long as that is true, the case for tightening policy more aggressively does not seem compelling.” He said, “The U.S. labor market may have more slack than the 4.1 percent unemployment rate suggests,” and singled out prime-age worker participation as a possible area of slack that could absorb additional hiring without creating undue inflation pressures.