US borrowing costs likely to stay low

Federal Reserve Bank of New York president William C Dudley says the pace of interest-rate increases is likely to be shallow once the Fed starts to tighten, and recent weakness in the economy was largely the result of temporary conditions.

“It will be important to monitor developments to determine whether the softness in the March labour market report evident on Friday foreshadows a more substantial slowing in the labour market than I currently anticipate,” he said in a speech yesterday.

Dudley reinforced chairwoman’s Janet Yellen’s message that borrowing costs are likely to remain low after the Fed raises its benchmark rate above zero. His comments were the first from the inner core of the Fed’s leadership since a government report last Friday showed payrolls expanded less than forecast in March.

The timing of the first rate increase since 2006 “will be data-dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated”, Dudley said.

“I anticipate that the path will be relatively shallow” as “headwinds in the aftermath of the financial crisis are still in evidence”.

The Fed last month dropped an assurance that it will be patient in tightening, while also reducing its forecasts for the benchmark rate. Yellen said after the meeting that the change in guidance does not mean the Fed will be impatient to start raising rates, a phrase Dudley repeated yesterday.

US employers added 126,000 workers to payrolls last month, the smallest gain since December 2013 and weaker than the most pessimistic forecast in a Bloomberg survey, a report from the Labour Department in Washington showed on Friday.

Even so, Dudley said a pick-up in growth will “lead to a further reduction of labour-market slack, with the unemployment rate approaching 5% by the second half of the year”. He also said inflation will “begin to firm” later this year.

“If this labour-market improvement continues and the Federal Open Market Committee is reasonably confident that inflation will move back to our 2% objective over the medium-term, then it would be appropriate to begin to normalise interest rates,” he said.

Two considerations will shape the pace of tightening once rates have been raised, he said: “How the economy evolves and how financial market conditions respond to movements in the federal funds rate.”

If financial conditions do not tighten much in response to a Fed rate increase, then the central bank may have to move more quickly, said Dudley.

Bloomberg