Fed’s Quarles upbeat about economy; rate policy on steady course

NEW YORK: Despite some muddled signals on the economy, Federal Reserve governor Randal Quarles is upbeat about the growth prospects and said the central bank could stay the course on gradual interest rate increases.

While he acknowledges it is unclear how long the solid economic growth can be sustained, he points to positive signs in the labour market and business investment.

“Economic conditions are as close to meeting the Federal Reserve’s dual mandate for monetary policy – maximum sustainable employment and price stability – as they have been in a long time,” Quarles said in his prepared speech.

Unemployment is near a 50-year low and inflation is sitting right around the Fed’s two per cent target.

In addition, business investment climbed 10 per cent in the first half of the year, which suggests productivity will rise, allowing the economy to continue to grow without fuelling inflation and while attracting more workers into the labour pool, he told the Economic Club of New York.

In the minutes of the last month’s policy meeting when the Fed raised the benchmark interest rate for the third time this year, officials said gradual rate hikes were appropriate.

And Quarles, the Fed’s vice chairman of financial supervision, said he was hopeful economic productivity “could accelerate from its relatively anaemic pace of late, sustaining growth without overheating the economy.”

However, some signals, including inflation, that the Fed uses to decide whether to apply the brakes to the economy through a higher interest rate, may be muddled and masking more worrying developments.

But likening the central bank’s job to that of a pilot, he said the Fed should continue to hold a steady course and only apply a “more athletic response” if one of those signals moves decidedly in one direction.

“Precisely because of the uncertainty around the course inputs, the right strategy was to set a course based on your knowledge of the destination, winds, and performance of your plane; communicate that course clearly to air traffic control so everyone knew what you were doing; and then stick to that course steadily even as the course needle might waver from side to side across your instrument,” he said.