NEW YORK (Reuters) - Influential Federal Reserve Vice Chair Randal Quarles, setting aside recent data weakness and complaints from the White House about interest rate hikes, on Friday gave a bullish view of the U.S. economy and said more rate increases may be needed if recent positive trends in productivity and investment continue.
Quarles said he agreed it was “prudent” to put further hikes on hold while the Fed waits for overseas risks to play out, and to see if recent disappointing retail sales and job figures were an anomaly or the leading edge of a slow down.
But Quarles said he was inclined to dismiss the recent data as “a bit odd” and “inconsistent” with underlying strength, wage gains that should be boosting households, and a rise in productivity he feels could be “persistent” and lead to stronger growth down the road.
While the Fed remains on hold for now, “my sense is that further increases in the policy rate may be necessary at some point,” Quarles said at a Manhattan Institute monetary policy conference. It was a view he said was “consistent with my optimistic view of the economy’s growth potential and momentum.”
The current level of rates, he said, was still stimulating growth, with his estimate of the neutral rate “somewhat north of where we are now,” in a range of 2.25 and 2.5 percent.
Quarles remarks put him at the more aggressive edge of a debate at the Fed that has recently focused on weak inflation, possibly slowing growth, and even whether, as many investors expect, it was time to consider a rate cut.
It also puts Quarles, an appointee of President Donald Trump as the Fed’s vice chair for regulatory matters, out of step with White House criticism of last year’s rate hikes, and at odds with Stephen Moore, Trump’s latest intended pick for the Fed board. Moore has said rates should be cut 50 basis points.
But since joining the Fed, Quarles has been among the more optimistic that the U.S. may be approaching an era of faster underlying growth, driven by rising productivity.
He said he regarded financial risks in general as “not outside their normal range,” the basic reason Quarles said he did not think the Fed needed to demand large banks to hold even more capital.
In general, there were “many reasons to expect relatively strong growth in the coming years, and I expect continued gains supported by profit growth, continuing impetus from incentives in the tax bill, and a generally favorable business environment,” Quarles said. Increased capital spending is one reasion Quarles said he believes productivity may be growing faster, and “it could be that tight labor markets have played a role in boosting labor productivity growth as employers work to increase efficiency as new workers become harder to find.”
While acknowledging a drop in inflation expectations remained a concern, he also said the current rate of price increases of around 1.8 percent was “roughly consistent” with the Fed’s 2 percent objective.
Reporting by Howard Schneider; Editing by Chizu Nomiyama