In today’s most anticipated Fed speech, outgoing NY Fed president Bill Dudley delivered a speech at a SIFMA conference in New York, titled “The Outlook for the US Economy in 2018 and Beyond”, in which he warned bluntly that the prospect of U.S. economic overheating “is a real risk over the next few years” and cautioned that one area he is “slightly worried about is financial market asset valuations, which I would characterize as elevated.”
But before algos read too much into it and decide to sell on yet another “irrational exuberance” moment, the head of the most important regional Fed immediately hedged that even a “significant” market drop would not have the “destructive impact” we saw a decade ago, to wit:
I am also less worried because the financial system today is much more resilient and robust than it was a decade ago. Thus, even if financial asset prices were to decline significantly—which presumably would occur if the economic outlook were to deteriorate—I don’t think such declines would have the destructive impact we saw a decade ago.
Is he right? We will let readers decide…
He then reverted back to rates, saying that “I will continue to advocate for gradually removing monetary policy accommodation. As I see it, the case for doing so remains strong.”
The reason for that is the same one Bank of America highlighted earlier: namely that “financial conditions today are easier than when we started to remove monetary policy accommodation.” Which is precisely what Goldman warned nearly a year ago, when it said that it appeared that Yellen had lost control of the market.
Sure enough, to Dudley, “this suggests that the Federal Reserve may have to press harder on the brakes at some point over the next few years. If that happens, the risk of a hard landing will increase.”
Dudley wasn’t done, and realizing he has little to lose by telling the truth, now that he is on his way out, said that “the second risk is the long-term fiscal position of the United States.” I.e. US debt.
Still, he said that “the economy is likely to continue to grow at an above-trend pace, which should lead to a tighter labor market and faster wage growth.”
“Under such conditions, I would expect the inflation rate to drift higher toward the FOMC’s 2 percent long-run objective.”
Finally, Dudley also touched on the recent passed tax cut and said that “while …read more