Talking Points:
- Fed members Dudley and Williams delivered remarks on Tuesday
- Both were optimistic about hitting the 2 percent inflation target
- The US Dollar was held back by comments from Donald Trump
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New York Fed President William Dudley, an FOMC voter, said that 2 percent inflation seemed very likely over the next couple of yearsin a speech on Tuesday. He went on to strike an optimistic tone about economic expansion over the next few years and highlighted the large increase in consumer confidence.
Additional comments from William Dudley:
- Expansion young in terms of health of home finances
- Inflation is simply not a problem
- Pressure on labor resources increasingly quite slow
- Little risk Fed will snuff out expansion anytime soon
- Use of housing debt to finance consumption has waned
- Reasonable home equity extractions would boost growth
- Wealth from rising home prices is locked up in homes
- Fed thinks we are near max sustainable employment
- Home equity may become source of funds again
- Brexit will cause a messy divorce
- U.S. corporate tax system badly in need of fixing
- Border tax adjustment proposal in house pretty dramatic
- Would like to see corporate tax reform
- Keeping tougher capital requirements makes sense
- Repeat of 2007/2008 crisis unlikely next 5-10 years
San Francisco Fed President John Williams – who is not an FOMC voter this year – spoke later in the day. Like Dudley, he too saw the Fed as getting closer to 2 percent inflation. He added that he sees a good case for three rate hikes in 2017. As for his views on fiscal policy, Williams said he will re-assess his outlook once new policies are in place but allowed that government spending could lift growth in the next year or two.
Additional comments from John Williams:
- Running economy too hot too long can cause imbalances
- Risks to the outlook roughly balanced
- Gradual rate hikes reduces asset bubble risks
- Further gradual fed rate increases appropriate
- Expects jobless rate to bottom around 4.5%
- Labor market strong, economic momentum good
- Trend in US GDP growth potential 1.5% - 1.75%
- Fed policy is politically independent
- Political independence has helped make Fed successful
- Watching risk-taking carefully in view of low rates
- Possibility of China hard landing among risks to U.S.
- Political risk in Europe also a source of uncertainty
- Hard to predict what fiscal policy means for outlook
- Fiscal policy prospects have raised upside risk
- Let balance sheet shrink once rates quite a way from zero
- Fiscal stimulus may hasten balance sheet discussion
- Letting balance sheet shrink will rely on risk assessment
The US Dollar was rather uninspired despite these hawkish comments. Earlier in the day, President-elect Donald Trump commented that the US Dollar was too high. Analyst David Cottle mentioned that Trump’s remarks left investors wondering whether the new administration will seek an end to the US’ long-standing “strong dollar” policy.
Chart compiled in Tradingview
