Federal Reserve Governor Daniel Tarullo signaled that the Fed may hike interest rates at its next meeting and that it would watch and react to the impact of President-elect Donald Trump's fiscal policies when deciding the path forward for monetary policy.
At the Wall Street Journal‘s CEO Council event on Tuesday, Tarullo was asked about Trump's proposed policies of tax cuts and infrastructure spending and how they might impact the growth of the economy and the Federal Reserve's outlook.
"Fiscal policy of course is one of the important background considerations in thinking about the appropriate monetary policy to achieve the dual mandate of maximum employment and price stability," Tarullo said.
"We obviously are sensitive to the impact that fiscal policy has," he said. "But I want to emphasize it's to the impact, it's not to an expectation, let's give the new administration time to actually get its program and for Congress to decide what its actually going to do and then the Fed will appropriately react to the impact of that in the economy."
Tarullo also said the case for raising rates is stronger now than it has been in previous months due to economic indicators such as the increase in core inflation.
"All of that has suggested to me that we're in a somewhat different situation than where I thought we were six or eight or 10 months, 12 months ago where I thought we had more opportunity to create more jobs get more production in the country," he said.
The Fed governor warned that there were still grounds for caution and that there was still slack in the labor force.
"Now I still think there are some grounds for caution," Tarullo said. "We still have fewer tools to respond if a recession were to come from some external source."
"I think there is still some slack in the labor market, although obviously not as much as there was before, and so there are reasons to be cautious in moving forward."
The Fed decided to raise rates to a quarter of a percentage point in December 2015 after holding them near zero since December 2008. The Fed has been cautious since then, deciding to keep rates unchanged in all seven meetings held in 2016. Tarullo said the Fed may finally hike at the next Federal Open Market Committee meeting on Dec. 14.
"I think the policy now ought to be one in which we respond to the incoming data," Tarullo said. "At this juncture it's more likely that the next response would be a tightening than more accommodation."
Update 3:18 P.M.: This post has been updated to clarify Tarullo's comments.
Published under: Federal Reserve