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US fiscal policy appears to be making a “stimulative” shift, raising the risk that economic growth and inflation will exceed expectations, the influential head of the New York Federal Reserve said on Thursday.

William Dudley cautioned that there remains “considerable uncertainty” over fiscal policy, but that “it seems likely that it will shift over time to a more stimulative setting”.

“Consequently, it appears that the risks for both economic growth and inflation over the medium to longer term may be shifting gradually to the upside,” Mr Dudley said in a speech at the University of South Florida Sarasota-Manatee.

Mr Dudley, who is a voting member of the Fed’s policy-setting board and is seen as a close confidant of chair Janet Yellen, also reiterated his view that “it seems appropriate to scale back monetary policy accommodation gradually in order to reduce the risk of the economy overheating, and to avoid a significant inflation overshoot in the medium term”.

The central banker emphasised that the Fed was not looking to halt its accommodation abruptly, but that it will slowly ease-up on the accelerator:

William McChesney Martin, the ninth chair of the FOMC, once famously opined that the Federal Reserve is “in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” I don’t think we are removing the punch bowl, yet. We’re just adding a bit more fruit juice.

Mr Dudley also remarked on plans for reducing the size of the Fed’s balance sheet that was dramatically inflated by several rounds of long-term bond purchases. He said the best way to narrow the balance sheet would be to “taper reinvestments” of maturing securities “gradually and predictably”.

Copyright The Financial Times Limited 2017. All rights reserved.
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