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02 29 2016 | by Victor Xing | Central Banks

President Dudley’s speech at the PBOC-FRBNY symposium

Summary of President Dudley’s speech at the PBOC-FRBNY joint symposium

New York Fed President Dudley reiterated his concerns on inflation expectations despite a recent pickup in realized inflation.  The more-dovish-than-expected speech also elevated the significance of New York Fed’s Survey of Consumer Expectations:

President Dudley highlighted New York Fed's Survey of Consumer Expectations
New York Fed Survey of Consumer Expectations
Financial conditions (consistent with FED’s overall outlook, similar to Yellen and Brainard)
  • “Financial market conditions have tightened since the start of the year, mostly in response to international developments”
  • “If this tightening of financial conditions were to persist, it could potentially lead to a more significant downgrade to my outlook”
Balance of risks
  • “At this moment, I judge that the balance of risks to my growth and inflation outlooks may be starting to tilt slightly to the downside”
Inflation and inflation expectations (no mentions of PCE/CPI; highlights on TIPS breakevens / FED5y5y)
  • “What I find more concerning is the decline in some household survey measures of longer-term inflation expectations. For example, the median of three-year expectations from the New York Fed’s Survey of Consumer Expectations has declined over the past year to its lowest reading in the survey’s short history, and the longer-running University of Michigan measure is at the bottom of its historical range. Further declines in either measure would be worrisome”
  • “[O]n balance, I am somewhat less confident than I was before. Partly, this reflects my assessment that uncertainty to the outlook has increased and that downside risks have crept up”
  • “On inflation, we continue to fall short of our 2 percent objective for the personal consumption expenditure (PCE) deflator. This shortfall looks likely to continue longer than I had earlier anticipated due to the persistent strength of the dollar and weakness in energy prices. However, I continue to expect a gradual return to our 2 percent objective as the transitory factors that have held down inflation dissipate.”
  • “Although energy prices will eventually stop falling and the dollar will stop appreciating, these factors appear to have had a more persistent depressing influence on inflation than previously anticipated.” (consistent with Yellen and Brainard)
  • “Evidence on the inflation expectations front suggests some cause for concern. In particular, market-based measures of longer-term inflation compensation derived from nominal and inflation-indexed Treasury securities have fallen to very low levels. In addition, some survey measures of household inflation expectations have recently moved lower”
  • On discounting the decline of market-based measures of inflation compensation:“Still, given the extent to which inflation compensation has fallen since mid-2014, I believe that it is prudent to consider the possibility that longer-term inflation expectations of market participants may have declined somewhat
Labor market conditions (latest update on Dudley’s NAIRU estimate)
  • “Although the January increase of 151,000 was below last year’s pace, other aspects of the report were strong. The January data indicated substantial gains in wages and hours worked, which implies healthy real income growth for the household sector”
  • “Consistent with a tighter labor market, the share of the working-age population that is employed has risen gradually, and the labor force participation rate has stabilized”
  • “If [2% real GDP in 2016] materializes, then we should see some further reduction in the unemployment rate to around my estimate of the rate—about 4¾ percent—that I view as consistent with stable inflation over the long term”
Easing fiscal headwinds
  • “The fiscal 2016 budget package passed at the end of last year, which extended a number of tax breaks and eased caps on spending, means that fiscal policy should provide a moderate stimulus this year”
  • “Recent economic and financial developments have not yet led me to make a fundamental change in my outlook for U.S. growth in 2016”
  • “I have marked down my growth outlook very modestly”
  • “The latest ISM non-manufacturing index suggests the possibility of a slower pace of growth also in the services sector, which has been relatively robust. Consumer spending growth—which had been a brighter spot for most of 2015—also slowed notably in the fourth quarter”
On a minor note that is nonetheless interesting – Governor Brainard had called for more monetary policy coordination between central banks in her recent speech, but Dudley sees the following:”Central banks, therefore, by individually acting on their domestic economy mandates, can collectively promote the global economy.”

Next article02 26 2016 | by Victor Xing | Central Banks

Governor Brainard on inflation and policy coordination