Quarles Backs Fed's Gradual Policy Course -- 2nd Update
October 18 2018 - 2:18PM
Dow Jones News
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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