By Kate Davidson 

Federal Reserve Vice Chairman for Supervision Randal Quarles reaffirmed the central bank's gradual monetary-policy course Thursday, saying policy makers should avoid focusing too much on metrics that come with a higher degree of uncertainty, such as some measures of labor slack, productivity and inflation.

Speaking to the Economic Club of New York, Mr. Quarles said his outlook hasn't changed much since February. The U.S. economy is still "in a good spot," he said, and there are reasons to be optimistic about the economy's potential capacity.

"The more the economy's potential growth increases, the more gradual we can be in our removal of monetary-policy accommodation," he said.

The official also said it is quite possible the U.S. can sustain the sorts of growth levels it has been recording lately. Recession risks are low, he said, adding "all the indicators currently are for a strong economy for a significant period into the future."

Mr. Quarles cautioned, however, that inflation may not be as reliable an indicator of potential overheating in the economy as it once was. He said that he expects relatively strong growth could continue without running into economic constraints, but that the Fed should pay attention to other indicators of tightness and overheating in addition to inflation, such as direct measures of labor utilization or signs of shortages and bottlenecks in production.

Greater uncertainty doesn't mean policy makers are without a clear guide, or that policy itself could drift, he said. It means Fed officials should "chart a course that is stable, gradual and predictable," and follow that "unless some strong and steady signal requires a firm but moderate correction."

Mr. Quarles likened central bankers to pilots looking at an airplane control panel when navigation instruments weren't as sophisticated as they are today. The needle charting the pilot's course could wander for any number of reasons.

"The first rule taught to us as young pilots was, 'Don't chase the needles,'" the amateur pilot said.

"Put another way, while I think that there is enough reason to think that the productive capacity of our economy might be increasing so that we should not feel compelled to accelerate our pace, I also think there is enough doubt about current inflation as an infallibly reliable measure of current resource constraints that the continued gradual removal of accommodation is appropriate," he said.

Fed officials raised their benchmark federal-funds rate a quarter percentage point last month, to a range between 2% to 2.25%. Officials have penciled in one more rate increase this year, and three in 2019.

In his remarks, Mr. Quarles also said there might be reasons to look at the jobless rate differently. The unemployment rate now stands at a very low 3.7% and is well under most estimates of full employment, which indicates that the labor market has the prospect to drive up inflation at some point.

But Mr. Quarles observed that the U.S. workforce becoming more educated may have upended that relationship. He said it is possible that full employment levels are much lower than in the past due to the different nature of the workforce. College-educated workers have long enjoyed lower rates of unemployment, and more Americans now have college degrees.

Mr. Quarles said President Donald Trump's criticism of the Fed -- he said the Fed's gone "loco" and is his "biggest threat" -- isn't a significant problem for the central bank. "We stay pretty focused on the facts of the economy," Mr. Quarles said, adding he saw no sign the administration had sought to undermine the central bank's independence.

The Fed official also said he was wary of tightening U.S. bank-capital requirements any further, calling them "the highest in the world" and saying that toughening them "would come at a cost of the ability of the system to provide credit."

He said he disagreed with other Fed officials who have called for deploying the so-called countercyclical capital buffer, which is designed to raise banks' minimum capital requirements during good times. The tool shouldn't be used to respond to changes in the business cycle, he said, but rather to financial-stability risks, which the Fed views as moderate.

--Michael S. Derby and Ryan Tracy contributed to this article.

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

October 18, 2018 14:03 ET (18:03 GMT)

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