NEW YORK (BLOOMBERG) - Federal Reserve Bank of New York President William Dudley signaled that he approves of higher interest rates over time as the economy continues to improve, while cautioning that fiscal and monetary policy need to work together to secure the longer-term outlook.
"Assuming the economy stays on this trajectory, I would favor making monetary policy somewhat less accommodative over time by gradually pushing up the level of short-term interest rates," Mr Dudley said Monday, speaking from a prepared text for delivery in New York. Policy makers gather to discuss interest rates on Dec. 13-14 in Washington, and are widely expected to raise the range for their benchmark short-term lending rate by 25 basis points for the second time in 12 months.
While the US economy is moving toward the Fed's two goals of maximum employment and 2 per cent inflation, Mr Dudley pointed out that the US faces longer-term challenges and urged fiscal policy makers to keep in mind macroeconomic stability. His comments come after Donald Trump's surprise victory in the Nov. 8 presidential election stoked market expectations for fiscal policy action.
"Economic expansions don't die of old age, and there appear to be few imbalances in the economy that could lead to the current expansion ending," Mr Dudley said. "But, in order for this to remain the case, it is important that fiscal policy and monetary policy are well aligned going forward."
Mr Dudley said it's important that the US retains "sufficient fiscal capacity so that fiscal policy can support the economy when the next cyclical downturn does occur."
Despite his warnings about the future, Mr Dudley was optimistic about the current situation, saying that job gains have been "sturdy," personal consumption has been driving growth, and wage gains, though "relatively muted," have begun to move up.
Mr Dudley noted that financial market conditions have "tightened modestly" since the election, saying that may reflect expectations that expansionary fiscal policy will prompt the Federal Open Market Committee to tighten monetary policy more quickly.
"Obviously, there is still considerable uncertainty about how fiscal policy will evolve over the next few years," he said, saying that it's "premature" to make judgments and that he will update his forecasts as the picture comes into focus.
Mr Dudley advocated putting in place automatic fiscal stabilizers, saying that he favors them over discretionary fiscal policy.
"They would typically go into effect more quickly and would be better anticipated," he said. "Robust automatic fiscal stabilizers would complement monetary policy, and take some pressure off of the Federal Reserve to undertake extraordinary measures in situations where there is little scope for cutting short-term interest rates."
