Friday 21 October 2016

Outside shocks biggest danger to US, says Fed official

Jonathan Spicer

Published 14/02/2016 | 02:30

America's Federal Reserve policy is "appropriately quite accommodative" given the low level of inflation, which poses little threat to a US economic expansion that will only grow older unless there is an outside shock, an influential Fed official said.

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New York Fed president William Dudley, who did not directly address recent market turmoil in prepared remarks, noted that the current US expansion is nearly seven years old and the third longest in the post-World War Two period.

But its sheer age does not mean that the risk of recession is "edging higher," he said. "Since the possibility is low that a significant inflation risk would emerge over the near term, this means that the main danger facing the current expansion is the risk of large, adverse shocks."

Many investors believe that shock has already arrived as stocks and oil markets have plunged since the beginning of the year on fears of a global economic slowdown that could knock the US economy into recession.

The Fed meanwhile raised rates from near zero in December and may well continue tightening policy gradually if US economic data remains stable, such as a solid rebound last month in retail sales.

Dudley, a close ally of Fed Chair Janet Yellen and a permanent voter on US monetary policy, said key areas of the world's largest economy are in good shape including US housing, while the banking sector is now better capitalised.

"Given that the labour market still appears to have some excess slack and inflation is below the Federal Reserve's objective, monetary policy is appropriately still quite accommodative despite the advancing age of the expansion," he said.

© Reuters

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