The Federal Reserve may have to “press harder on the brakes” at some point over the next few years, increasing the risk of a hard landing for the economy, New York Fed President William Dudley said Thursday.
The risk of economic overheating “seems like an odd issue to focus on when inflation is low, but it strikes me that this is a real risk over the next few years,” Dudley said in a speech to the Securities and Financial Markets Association.
Even though the Fed has raised short-term interest rates gradually over the past two years, financial conditions today are easier than when the Fed started.
This suggests that the Fed might have to be more aggressive with those rate hikes, the New York Fed president said.
Dudley has already announced that he plans to step down from his post in mid-2018.
The New York Fed president said he was sanguine about the near-term outlook. He said that inflation will drift up toward the Fed’s 2% target and that he had boosted his growth outlook to 2.5%-2.75% due to fiscal stimulus. He dismissed concerns that the yield curve is flattening in a way that suggests the economy is weaker than other data suggest.
He said the case for gradually raising interest rates remains strong.
But while 2018 will be a good year, Dudley said he was “considerably more cautious” about the longer term.
Dudley had said last month that he was not a big fan of the Republican tax bill and his comments Thursday indicate that he has not warmed up to it.
“While this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable,” he said.
He noted the Congressional Budget Office now projects that the debt service costs in 2027 will be more than $800 billion, more than double today’s costs.