Federal Reserve Bank of New York President William C. Dudley said the path of interest-rate increases is likely to be “shallow” once the Fed starts to tighten, and recent economic weakness probably won’t persist.
The timing of the first rate increase since 2006 “will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated,” Dudley said in a speech Monday in Newark, New Jersey. “I anticipate that the path will be relatively shallow” as “headwinds in the aftermath of the financial crisis are still in evidence.”
Dudley reinforced Chair Janet Yellen’s message that borrowing costs are likely to remain low after the Fed raises its benchmark rate above zero. His comments were the first from the inner core of the Fed’s leadership since a government report Friday showed payrolls expanded less than anticipated in March.
How financial markets respond to the Fed’s actions will help determine the pace of rate increases, said Dudley, 62, a former Goldman Sachs Group Inc. economist who is the central bank’s chief liaison with Wall Street.
“If we raise interest rates and portfolios perform poorly, that’s likely to slow us down,” Dudley said in response to a question. On the other hand, “if financial market conditions do not tighten much in response to higher short-term interest rates, we might have to move more quickly,” he said in his prepared remarks.
Stocks rebounded after Dudley’s comments. The Standard & Poor’s 500 Index climbed 0.8 percent to 2,083.87 at 12:23 p.m. after opening 0.5 percent lower.
U.S. employers added 126,000 workers to payrolls last month, the smallest gain since December 2013 and weaker than the most pessimistic forecast in a Bloomberg survey, a report from the Labor Department in Washington showed Friday.
Dudley said he will be watching “to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate.”
He said slow first-quarter growth largely reflected temporary conditions, including unusually harsh winter weather. A pickup in growth will “lead to a further reduction of labor-market slack,” with unemployment approaching 5 percent by the second half of the year. He also said inflation will “begin to firm” later this year.
“If this labor-market improvement continues and the FOMC is reasonably confident that inflation will move back to our 2 percent objective over the medium-term, then it would be appropriate to begin to normalize interest rates,” he said. “In my view, it would be a cause for celebration.”