Fed's Dudley still sees inflation rebound, U.S. rate hikes

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Fed's Dudley still sees inflation rebound, U.S. rate hikes

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By Jonathan Spicer and Stephanie Kelly NEW YORK (Reuters) – The Federal Reserve should continue gradually raising U.S. interest rates given low inflation should rebound, an influential Fed policymaker said in a Thursday speech that sounded slightly less confident than his previous hawkish comments in the face of weak price readings. New York Fed President William Dudley did not repeat an assertion three weeks ago that he expects to raise rates once more this year, and he called the persistent shortfall in prices surprising. Yet he reinforced the U.S. central bank’s general expectation that an inflation rebound is around the corner, allowing it to continue tightening monetary policy. “Even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate to continue to remove monetary policy accommodation gradually,” said Dudley, a permanent voter on policy and a close ally of Fed Chair Janet Yellen. The central bank has raised rates twice this year in a nod to decent economic growth, falling unemployment and solid job gains. Yet months of falling or flat inflation readings have flummoxed policymakers and caused investors to grow sceptical of a December rate hike, as implied in Fed forecasts from June. Dudley, who also predicted the Fed’s bond portfolio would shrink to $2.4 trillion (1.84 trillion pounds) to $3.5 trillion by early next decade, said the inflation weakness may hint at “structural factors” that would be positive for the economy and for workers. The Fed’s preferred inflation measure is now 1.4 percent. But Dudley said the falling dollar and “the fading of effects from a number of temporary, idiosyncratic factors” means that inflation will rise to the Fed’s 2-percent goal “over the medium term.” “I expect that the U.S. economy will continue to perform quite well,” he added.

(Reporting by Jonathan Spicer and Stephanie Kelly; editing by Diane Craft)
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