After Market Turmoil, Fed Officials Stand Firm on Rate-Increase Course

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Federal Reserve officials signaled the recent spasm of market volatility isn’t prompting them to rethink their path of interest-rate increases or upbeat economic outlook.

“I don’t think it’s a big story at all for central bankers,” New York Fed President

William Dudley

said Wednesday. “If the stock market were to go down precipitously and stay down, then that would actually feed into the economic outlook, and that would affect my view in terms of the implications for monetary policy.”

Dallas Fed President

Robert Kaplan

said, “I think it’s healthy that there is some correction, a little more volatility in markets.”

He added that he still favors raising rates in a “patient and gradual manner.”

Fed officials in December raised their benchmark short-term interest rate to a range between 1.25% and 1.5% and penciled in three quarter-percentage point increases this year if the economy performs as expected. Last week, they released an updated policy statement signaling slightly more confidence in their projections for stronger economic growth this year, with continued declines in unemployment.

Stocks sold off Friday after new employment data showed strong wage gains in January, causing some investors to worry that inflation might surge and the Fed might raise rates more aggressively to keep price pressures under control.

Then when stock prices seesawed Monday and Tuesday, some market participants started thinking the Fed might hold off on rate increases or move less this year than forecast out of concern that the financial gyrations might hurt the economy.

The Fed officials who spoke Wednesday sounded sanguine. “My outlook hasn’t changed because the stock market is a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago,” Mr. Dudley said before an event held by the European American Chamber of Commerce and Thomson Reuters in New York.

“Having a bump like this has virtually no consequence in my view to the economic outlook,” Mr. Dudley said.

St. Louis President

James Bullard

said on Tuesday that market participants shouldn’t overreact to the strong January employment figures.

“I caution against interpreting good news from labor markets as translating directly into higher inflation.” Mr. Bullard said in an appearance in Lexington, Ky. “The empirical relationship between these variables has broken down in recent years and may be close to zero.”

Fed officials want inflation to rise to their 2% target, which they view as a healthy level for the economy. Their median projection is to reach that goal by the end of next year.

They have said for a while they viewed asset prices as “elevated,” but haven’t suggested they were worried about any potentially dangerous bubble that could burst and harm the economy, as happened before the past two recessions.

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