Federal Reserve Bank of New York President William C. Dudley said the pace of interest-rate increases is likely to be “shallow” once the Fed starts to tighten, and recent weakness in the economy was largely the result of temporary conditions.
“It will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate,” he said in remarks prepared for a speech Monday in Newark, New Jersey.
Dudley reinforced Chair Janet Yellen’s message that borrowing costs are likely to remain low after the Fed raises its benchmark rate above zero. His comments were the first from the inner core of the Fed’s leadership since a government report Friday showed payrolls expanded less than forecast in March.
The timing of the first rate increase since 2006 “will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated,” Dudley said. “I anticipate that the path will be relatively shallow” as “headwinds in the aftermath of the financial crisis are still in evidence.”
The Fed last month dropped an assurance that it will be “patient” in tightening, while also reducing its forecasts for the benchmark rate. Yellen said after the meeting that the change in guidance doesn’t mean the Fed will be “impatient” to start raising rates, a phrase Dudley repeated.
Jobs Report
U.S. employers added 126,000 workers to payrolls last month, the smallest gain since December 2013 and weaker than the most pessimistic forecast in a Bloomberg survey, a report from the Labor Department in Washington showed Friday.
Even so, Dudley said a pickup in growth will “lead to a further reduction of labor-market slack, with the unemployment rate approaching 5 percent by the second half of the year.” He also said inflation will “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,” he said.
Two considerations will shape the pace of tightening once rates have been raised, he said: “how the economy evolves and how financial market conditions respond to movements in the federal funds rate.”
If financial conditions don’t tighten much in response to a Fed rate increase, then the central bank may have to move more quickly, he said. On the other hand, if conditions “tighten unduly,” that would probably cause the Fed to raise rates more slowly or even pause.