Balance of risks to economy still lie slightly to the downside, Fed's Dudley says

Risks to the US economy had diminished since the start of 2016, but continued to be tilted slightly to the downside, a top US central bank official said on Friday.

Together with the Federal Reserve’s limited ability to lower its main policy rate in reaction to negative developments, this argued for a gradual approach tightening, the president of the Federal Reserve bank of New York, William Dudley, said.

In remarks prepared for a speech that was to be delivered later that same day, Dudley said: “Given my outlook and risk assessment, I judge that a cautious and gradual approach to policy normalization is appropriate […] Moreover, caution is also called for because of our limited ability to reduce the policy rate to respond to adverse developments."

The rate-setter also referenced the fact that the uncertainties around his forecast for economic growth appeared “to be somewhat greater than usual” as a result of mixed signals in the data and because the factors that set off a wave of volatility earlier in the year “did not yet appear to be fully resolved”.

Dudley said there was “significant uncertainty” regarding growth prospects overseas and their potential impact on the US.

Likewise, measures of aggregate wage growth had remained subdued, a possible indication that there remained slack in the labour market.

He still expected falling slack in the economy and anchored longer-term inflation expectations to help push inflation back towards the Fed’s medium-term 2.0% target.

However, he cautioned that might take longer to achieve.

Recent increases in prices and measures of inflation "have increased my confidence around this outlook compared to earlier in the year, but it is still possible that the return of inflation to our objective could take longer than I anticipate," he said.