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Fed Vice Chair Quarles prefers 'more gradual' rate hikes

Brian Cheung

The economy still has plenty of room to grow, Federal Reserve Vice Chairman Randal Quarles said Thursday. Quarles, speaking at a moderated Economic Club of New York event, said his preferred path of rate hikes is “more gradual” than other Fed policymakers.

Quarles offered an optimistic perspective on economic growth in the U.S., saying that “strong growth” could be sustained because of the room to improve productivity. He added that if the economy sees more technological breakthroughs and improved production methods, the Fed could be more confident in a more hawkish monetary policy.

“The more the economy’s potential growth increases, the more gradual we can be in our removal of monetary policy accommodation,” Quarles said.

Warns against leaning on inflation

Quarles said that in its considerations, the Fed should be aware of uncertainty and chart a “course that is stable, gradual, and predictable,” but warned against leaning on inflation as an “infallibly reliable measure” of constraints to the economy.

Asked if he thinks the current path of rate hikes is threatening economic growth, Quarles said it depends on one’s expectations about the U.S. economic trajectory. Quarles reiterated that he is “optimistic about the potential of the economy.”

Quarles’s comments on the economic outlook are rare; as the vice chairman of supervision, Quarles’s primary job at the central bank concerns supervision. But as a sitting member of the Fed Board, Quarles is also a voting member of the Federal Open Market Committee.

Quarles still addressed the current regulatory framework, saying the Fed does not see enough concern in financial stability to turn on an extra supervisory tool on the largest banks called a “countercyclical capital buffer,” which would force the large financial institutions to retain more capital.

His comments come as other Fed figures opine on an economy that has become the subject of political interest as President Donald Trump continues to bash the Fed’s rate hikes ahead of the mid-term election. Earlier in the day, St. Louis Fed President James Bullard said the current federal funds rate target of between 2% and 2.25% is “about where it should be.” Bullard, who is not a voting member of the FOMC, said that despite Trump’s public criticism of the Fed, he “like[s] the president’s appointments” to the central bank’s board.

Quarles said that it is not unusual for presidents to comment on Fed policy.

“The job of the Fed is to remain focused on the facts of the economy and be independent from the administration,” Quarles said.

Quarles, in addition to Richard Clarida, are the two current members of the board to have been nominated by Trump.

Brian Cheung is a reporter at Yahoo Finance.

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