Economy

US Fed official sees gradual rate hikes even amid low inflation

US Fed official sees gradual rate hikes even amid low inflation”

Once the Federal Reserve starts its years-long plan to shrink its balance sheet, the US central bank will not be reassessing it each meeting as it does its interest-rate decisions, Cleveland Fed President Loretta Mester said on Thursday.

"I expect that the USA economy will continue to perform quite well, with slightly above-trend growth leading to further gradual tightening of the US labor market", Dudley said Thursday in remarks prepared for a speech in NY. He echoed the Fed leadership view that inflation is most likely transitory and that the FOMC should continue to "normalize" fiscal policy by raising rates.

"I think it's too soon to judge exactly the timing of when the next rate hike might occur", he said, "but I think the path is clear that of short-term rates are going to move gradually higher over time".

Five months of weak inflation data have cast doubt on their resolve to raise rates again this year. The central bank's forecasts imply roughly three rate hikes next year. Yet he reinforced the USA central bank's general expectation that an inflation rebound is around the corner, allowing it to continue tightening monetary policy before too long. Specifically, he said that "I have been surprised by the persistence of the shortfall from the FOMC's 2 percent long-run objective". "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 cited changes such as the growth of online retail and improved ability of consumers to compare prices as factors slowing price increases.

The U.S. dollar bought 107.80 Japanese yen, lower than 108.57 yen of the previous session. Dudley's comments on inflation implied that estimate may come down.

But those shifts would be positive for the economy, since it would mean the USA could put more people to work "without generating a troublesome large rise in inflation", Dudley said.

One of the Federal Reserve's mandates is to keep inflation hovering around the 2 percent mark-it is now sitting at 1.4 percent, just below their goal. He added that the shedding of Treasury and mortgage bonds would exert only a "modest" policy tightening over the years.



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