Fed Official Cautions Colleagues on Raising Interest Rates

$DIA, $SPY, $QQQ, $VXX

Federal Reserve Bank of New York President William Dudley suggested the central bank should be cautious in raising interest rates, given limits on its ability to respond to a recession with borrowing costs close to Zero meaning out of tools.

Noting concerns from some economists that the risk of a recession is increasing, Mr. Dudley told a central-banking seminar hosted at his bank that the Fed may have limited room to cut rates in the event of a downturn in the next few years. That may raise the need to turn again to unconventional policies, such as purchasing bonds.
“A risk management approach to monetary policy would suggest that the more concerned one is with the effectiveness of these policies at the zero lower bound, the more cautious one would be in the process of removing accommodation,” he said in the text of remarks Monday, posted on the New York Fed’s website.

The event was closed to the media.

Mr, Dudley cited studies showing the Fed’s 1st asset purchase program that started in Y 2008 had helped to reduce long-term interest rates and stimulate the economy, while later efforts had less, albeit significant, impact.

At its 20-21 September meeting, the FOMC voted to leave interest rates unchanged for the 6th time running, opting to wait for more evidence that gains in employment will continue and bring inflation closer to the Fed’s 2% target.

The FOMC policy makers noted that the case for a move had strengthened and most of them expected an increase this year from the current target range of 0.25 to 0.5%.

“Monetary policy remains accommodative,” Mr. Dudley said.

Calling the expansion “tepid,” he said that lackluster performance reflected the constraints on the Fed’s ability to stimulate growth once it had reduced rates effectively to Zero in December 2008.

“New York Fed staff have been conducting an extensive analysis of empirical measures of market liquidity and the effects certain regulations may have had on it,” he said. “The work to date finds little evidence — based on traditional liquidity measures — of any meaningful degradation in market liquidity across key asset classes. ”

He said that if further study revealed a link between regulation and lower liquidity, the costs would have to be measured against the benefits from making markets safer and more robust.

Monday, the US major stock market indexes finished at:

Volume: Trade was light with 798.2-M/shares exchanged on the NYSE.

• Russell 2000 +9.6% YTD
• NAS Comp +5.9% YTD
• S&P 500 +5.7% YTD
• DJIA +4.8% YTD

Stay tuned…

  caution, DIA, DJIA, Fed, FOMC, inflation, interest, liquidity, markets, QQQ, rates, Recession, regulation, SPY, stocks, VXX

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