Fed’s Dudley says couple more rate hikes in 2017 reasonable

Federal Reserve Bank of New York president William Dudley said three interest-rate hikes in 2017 is a “reasonable” projection and that the central bank may also begin shrinking its balance sheet later this year or in 2018, possibly pausing rate increases in the process.The median projection for three hikes from the 17 members who comprise the rate-setting Federal Open Market Committee “I think is in a reasonable place,” Dudley said in a Bloomberg Television interview with Michael McKee in Sarasota, Florida. “A couple more hikes this year seems reasonable.”Fed officials have already increased interest rates by a quarter-point once in 2017, and investors assign better-than-even odds that they will be able to hike twice more before year-end, according to prices of federal funds futures contracts.As president of the New York Fed, Dudley has a permanent vote on the FOMC and is widely seen as one of its most influential members. He said on Friday that “there’s not this huge rush that we have to tighten monetary policy quickly” because “the economy is clearly not overheating.” But he added that the time to begin shrinking the central bank’s $4.5tn balance sheet may be drawing near.“It wouldn’t surprise me if sometime later this year or sometime in 2018, should the economy perform in line with our expectations, that we’ll start to gradually let securities mature rather than reinvesting them,” Dudley said. “If we start to normalise the balance sheet, that’s a substitute for short-term rate hikes,” and “we might actually decide at the same time to take a little pause in terms of raising short-term interest rates,” he added.Dudley said he is “not that worried that the markets are going to react to the changes in our balance sheet in a violent way because it’s already factored in” to investors’ expectations.Fed officials have been treading carefully when it comes to the balance sheet because they want to avoid causing financial-market volatility.“I don’t think there is a strong need to differentiate between mortgages and Treasuries” when it comes to plans for allowing securities in the Fed’s portfolio to mature without reinvesting them, Dudley said. Some Fed officials have argued they should prioritise allowing mortgage-backed securities to roll off the balance sheet first.Dudley’s upbeat view on the US economy marks a shift from last year, when he and most other officials on the FOMC generally agreed that risks were tilted to the downside amid tepid global growth and sliding inflation expectations. That unfavourable balance of risks helped explain why they only raised rates once in 2016, despite projecting four moves at the beginning of the year.A price gauge based on personal consumption expenditures excluding food and energy rose 1.75% in February from a year earlier, marking the highest level of so-called core inflation since July 2014, according to figures published on Friday by the Commerce Department. Including all items, inflation accelerated to 2.1%, topping the Fed’s 2% target for the first time since 2012.Meanwhile, Federal Reserve vice-chairman Stanley Fischer last week said the Federal Open Market Committee’s median estimate for two more rate hikes this year “seems about right.”“That’s my forecast as well,” Fischer said in an interview with CNBC. Fischer said the US central bank is watching fiscal policy negotiations between Congress and the White House without prejudging the outcome. Watching and waiting “is the sensible thing to do,” he said, because proposals will be “different” as they work through the legislative process.He said the failure of the health-care bill may have changed his “internal calculus,” but not the overall outlook.Fischer’s term as vice chairman expires in June 2018. When asked if he would stay on at the central bank as a governor, Fischer said, “Well of course I have considered it.”“It has only been done once in all the Fed’s history,” he added. “I don’t have to make a decision about that right now.”Regarding the chance that the path of rates could be more aggressive or more gradual, Fischer said “the risks are more or less balanced.”Speaking to reporters later from Morgantown, West Virginia, Fed Governor Jerome Powell said he sees the central bank continuing to raise rates gradually if the economy stays on its current course.“I’m not going to say we’ve achieved maximum employment, but we’re getting close to it. Inflation is still a little bit short, but not terribly short” of the Fed’s target, he said. “It’s appropriate if we stay on this path for us to gradually raise interest rates.”Fischer said the reasons for the slump in productivity growth that are limiting the economy’s potential growth rate aren’t fully understood.