Fed's Dudley Sees Long-run Value Of Fed Funds Rate At 3.5%

The longer-run value of the federal funds rate is 3.5%, well below its historical level of 4.5%, said William Dudley, the president of the New York Fed, on Friday. The longer-run value is where the funds rate would encourage growth without generating inflation pressures. Estimates of the rate are important because it can be a clue to the eventual goal of Fed rate hikes. In a speech at a conference in New York sponsored by the University of Chicago Booth School of Business, Dudley said he was sympathetic to arguments that the Fed should proceed cautiously to hike rates, with short-term rates more likely to rise only gradually. But he said it was important not to overstate this conclusion and that there were also risks from too-slow policy. Dudley said the longer-run value of the Fed funds rate is now lower because the real potential GDP growth rate will be lower over the medium term, held down by slower growth in labor supply and lackluster productivity growth.

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