The U.S. Federal Reserve should continue with its gradual rate increases but must be prepared to slow the tightening if U.S. productivity breaks out of a several-year lull, as it may be poised to do, an influential Fed governor said on Thursday.
Randal Quarles, who rarely discusses monetary policy, painted a somewhat more optimistic picture than his colleagues on the economy’s longer-term capacity and said he favoured a bit more dovish path than most others in the U.S. central banking system.
“Absolutely, my path for policy is more gradual” than most other Fed policy-makers, said Mr. Quarles, the central bank’s vice-chair for supervision and point person on regulating banks.
For now, because it remained hard to tell where the currently strong economy would settle in the years ahead, the Fed should continue with its “stable, gradual, and predictable” approach of about one rate hike a quarter, he said.
The Fed should “follow that course through the temporarily shifting and sometimes conflicting signs from the economy unless some strong and steady signal requires a firm but moderate correction,” he told the Economic Club of New York.
The comments from Mr. Quarles, an appointee of U.S. President Donald Trump, reinforced expectations for tightening into next year. But they also pushed back on worries that a hot labour market would soon spark inflation and a more aggressive Fed response, which could truncate the near-record long economic expansion.
Unusually for a U.S. president, Mr. Trump himself has increased criticism of the Fed’s rate increases, calling them “crazy” and warning they would hurt the economy.
Mr. Quarles noted it was “not unprecedented” for the President to weigh in publicly. He added that productivity could well break above a 1-per-cent average growth rate in recent years owing to investments in technologies and a possible rise in labour participation.
While that scenario would boost longer-term growth and allow the Fed to avoid aggressive rate hikes, Mr. Quarles also said the Fed must be vigilant for overheating that may not be apparent in inflation readings, which are roughly at a 2-per-cent target.
“I see many reasons to be optimistic about the growth of the potential capacity of the economy over the next few years,” which would sustain growth without overheating the economy, Mr. Quarles said.
Still, he added, “I also think that we should pay attention to other indicators of tightness and overheating in addition to inflation.”