Fed's Quarles eyes more dovish rate path, U.S. productivity boost

NEW YORK (Reuters) - The Federal Reserve should continue with its gradual rate hikes but must be prepared to slow the tightening if U.S. productivity breaks out of a several-year lull, as it may be poised to do, an influential Fed governor said on Thursday.

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Randal Quarles, who rarely discusses monetary policy, painted a somewhat more optimistic picture than his colleagues on the economy’s longer-term capacity, and said he favored a bit more dovish path than most others at the U.S. central bank.

“Absolutely, my path for policy is more gradual” than most other Fed policymakers, said Quarles, the central bank’s vice chair for supervision and point person on regulating banks.

For now, because it remained hard to tell where the currently strong economy would settle in the years ahead, the Fed should continue with its “stable, gradual, and predictable” approach of about one rate hike per quarter, he said.

The Fed should “follow that course through the temporarily shifting and sometimes conflicting signs from the economy unless some strong and steady signal requires a firm but moderate correction,” he told the Economic Club of New York.

The comments from Quarles, an appointee of U.S. President Donald Trump, reinforced expectations for tightening into next year. But they also pushed back on worries that a hot labor market would soon spark inflation and a more aggressive Fed response, which could truncate the near-record long economic expansion.

Unusually for a U.S. president, Trump himself has ramped up criticism of the Fed’s rate hikes, calling them “crazy” and warning they would hurt the economy.

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Quarles noted it was “not unprecedented” for the president to weigh in publicly. He added that productivity could well break above a 1-percent average growth rate in recent years due to investments in technologies and a possible rise in labor participation.

While that scenario would boost longer-term growth and allow the Fed to avoid aggressive rate hikes, Quarles also said the Fed must be vigilant for overheating that may not be apparent in inflation readings, which are roughly at a 2-percent target.

“I see many reasons to be optimistic about the growth of the potential capacity of the economy over the next few years,” which would sustain growth without overheating the economy, Quarles said.

Still, he added, “I also think that we should pay attention to other indicators of tightness and overheating in addition to inflation.”

Reporting by Jonathan Spicer; Editing by Andrea Ricci