A pair of top ranking Federal Reserve officials recently made divergent assessments on the ideal trajectory of interest rates.
New York Fed President William Dudley told The New York Times that the central bank should soon raise interest rates for the second time in a year. Chicago Fed President Charles Evans, meanwhile, said that it could be better to encourage higher-than-normal inflation rather than hike interest rates.
The Fed body that sets monetary policy, the Federal Open Market Committee (FOMC), is scheduled to meet next in June. In December, for the first time since 2006, the FOMC increased the federal funds rate—a key interest rate-setting benchmark.
The hike was the first of two planned 0.25 percent increases—part of a so-called “normalization” policy.
In the weeks that followed, financial instability caused US stock prices to lose about one-tenth of their value. Financial markets were roiled by woes in China and the continued drop of crude oil prices.
The development caused lawmakers to question the timing of the Fed’s December hike—already a controversial move, given relatively sluggish wage growth and low inflation throughout the recovery from the Great Recession.
“We have not yet seen a sharp drop-off in growth, either globally or in the United States. But we certainly recognize that global market developments bear close watching,” Fed Chair Janet Yellen told a Congressional committee in February. “As I mentioned, financial conditions have become less supportive to growth.”
In an interview published by the Times on Monday, Dudley said he expected a continued “tightening of the US labor market” and a “gradual acceleration in wages.”
“And if that’s how the economy plays out, then I think we’re going to see further moves by the Fed to gradually normalize interest rates,” he said.
Evans, meanwhile, said that a more cautionary approach would be better, dismissing strict adherence to the Fed’s target inflation rate.
“Overshooting a little bit just to make sure you get to 2 percent strikes me as being quite sensible,” he said during a panel discussion in London.
“While the fundamentals for US growth continue to be good, uncertainty and risks remain,” Evans also noted. “In my opinion, the continuation of ‘wait and see’ monetary policy response is appropriate to ensure that economic growth continues.”
While Dudley sits on the FOMC and Evans does not, the latter appears to have some support for his position on the committee.
Last week, in another interview with The New York Times, St. Louis Fed President and FOMC member James Bullard said recent reports of sluggish economic growth in the first quarter caused him “to dial back some of my projections.”
In March, Bullard had said: “the next rate increase may not be far off provided that the economy evolves as expected.”
