Job gains to lift inflation, Fed should ‘gradually raise rates’
new york — The Federal Reserve should keep gradually raising interest rates amid a tightening US labour market that ought bring inflation back to its 2 per cent target, said New York Fed President William Dudley.
“Even though inflation is currently somewhat below our longerrun objective, I judge that it is still appropriate to continue to remove monetary policy accommodation gradually,” Dudley said on Friday in New York, echoing comments he made in a speech last month.
Dudley’s remarks indicate the Fed’s leadership is largely sticking to its assessment that inflation, despite an unexpected decline this year, will bounce back, putting the US central bank on track for another interest-rate increase in December. Fed Chair Janet Yellen, in a September 26 speech in Cleveland, said it would be “imprudent” to hold rates steady until inflation rebounds all the way to 2 per cent.
Fed officials have been wrestling with question of why a tightening labour market hasn’t spurred more wage and consumer price inflation. Workers on US payrolls declined 33,000 last month, according to data released Friday by the Labour Department in Washington, reflecting Hurricane Harvey’s impact on Texas and Irma’s fallout in Florida. At the same time, the unemployment rate fell to 4.2 per cent, the lowest level in 16 years.
Despite the improvements in the job market, the Fed’s preferred measure of consumer price inflation, which strips out food and energy components, declined to 1.3 per cent in the 12 months through August, from 1.9 per cent in January.
Dudley once again conceded it’s possible that technological changes that facilitate increased competition are keeping the inflation rate low and could restrain it from returning to 2 per cent, but he said the jury is still out.
“While some of this year’s shortfall can be explained by one-off factors — such as the sharp fall in prices for cellular phone service — its persistence suggests that more fundamental structural changes may also be playing a role,” he said. “Over the coming months, I hope that we will be better able to differentiate between these competing explanations.”
Earlier on Friday, Dallas Fed President Robert Kaplan and Atlanta Fed chief Raphael Bostic both suggested they were open to raising rates in December, but were still undecided.
“I think we ought to be patient,” Kaplan, who votes on monetary policy this year, said in an interview with CNBC television. “I’m openminded about December, but I’m not there yet.” — Bloomberg