(Reuters) - The Federal Reserve may briefly allow the U.S. unemployment rate to fall below what is considered sustainable in the long run in order for inflation to rise to the central bank's target, New York Federal Reserve bank president William Dudley said on Monday.
"We need the economy to run a little hot for at least some period of time to push inflation back up to our objective," Dudley said at a conference organized by Bloomberg News.
"I can certainly imagine a scenario where the unemployment rate dips a little bit below what we view as sustainable. That would be the mechanism to actually push inflation back up."
He also said the steady rise in the dollar's value could complicate the Fed's job, potentially hurting U.S. economic performance and pushing down inflation.
Though the value of the dollar is not a policy goal of the Fed's, Dudley said it had to be taken "on board" as part of the central bank's economic forecast.
The dollar softened on Monday as other major currencies recovered some ground after 10 weeks of gains by the dollar index, its longest winning streak since the greenback's free float in 1973.
Even as the Fed prepares for its first interest rate increase in six years, Dudley's remarks reinforced the view that the central bank intends to keep policy accommodative until it is sure U.S. labor markets have fully recovered.
That first rate hike is expected next year, a policy change Dudley said he hopes can take place in order to being lifting rates from the zero level where they have remained for six years.
But the Fed's economic projections forsee a slow evolution from there, with rates only approaching a normal level in 2017. Some individual members' projections also see the unemployment rate falling below the level considered consistent with stable prices.
Dudley said a long list of forces has kept inflation tame, while there remains ample evidence of "excessive slack" in the U.S., and concern that workers sidelined by the financial crisis may lose the chance of ever returning to work unless the Fed keeps policy loose.
"Inflation is quiescent for a very simple reason. We have excess slack in the economy," he said. "We are below the two-percent inflation target so that argues for more patience."
The Fed in its most recent statement retained language saying it would be a "considerable time" beyond this fall before any initial interest rate increase.
Some Fed officials fear that has put the central bank behind the curve of an improving economy, and raised the risk of inflation rising too quickly.
But Dudley, expressing a view many analysts feel reflects a core opinion at the central bank, said the Fed should wait to raise rates until it is clear the recovery is solidly on track.
"You have to make sure that when you start to raise interest rates the economy can take it," he said. "You want to push the unemployment rate down."
reuters.com
"We need the economy to run a little hot for at least some period of time to push inflation back up to our objective," Dudley said at a conference organized by Bloomberg News.
"I can certainly imagine a scenario where the unemployment rate dips a little bit below what we view as sustainable. That would be the mechanism to actually push inflation back up."
He also said the steady rise in the dollar's value could complicate the Fed's job, potentially hurting U.S. economic performance and pushing down inflation.
Though the value of the dollar is not a policy goal of the Fed's, Dudley said it had to be taken "on board" as part of the central bank's economic forecast.
The dollar softened on Monday as other major currencies recovered some ground after 10 weeks of gains by the dollar index, its longest winning streak since the greenback's free float in 1973.
Even as the Fed prepares for its first interest rate increase in six years, Dudley's remarks reinforced the view that the central bank intends to keep policy accommodative until it is sure U.S. labor markets have fully recovered.
That first rate hike is expected next year, a policy change Dudley said he hopes can take place in order to being lifting rates from the zero level where they have remained for six years.
But the Fed's economic projections forsee a slow evolution from there, with rates only approaching a normal level in 2017. Some individual members' projections also see the unemployment rate falling below the level considered consistent with stable prices.
Dudley said a long list of forces has kept inflation tame, while there remains ample evidence of "excessive slack" in the U.S., and concern that workers sidelined by the financial crisis may lose the chance of ever returning to work unless the Fed keeps policy loose.
"Inflation is quiescent for a very simple reason. We have excess slack in the economy," he said. "We are below the two-percent inflation target so that argues for more patience."
The Fed in its most recent statement retained language saying it would be a "considerable time" beyond this fall before any initial interest rate increase.
Some Fed officials fear that has put the central bank behind the curve of an improving economy, and raised the risk of inflation rising too quickly.
But Dudley, expressing a view many analysts feel reflects a core opinion at the central bank, said the Fed should wait to raise rates until it is clear the recovery is solidly on track.
"You have to make sure that when you start to raise interest rates the economy can take it," he said. "You want to push the unemployment rate down."
reuters.com
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