Fed's Williams, Dudley Stress Soft Ceiling on Inflation Goal

(Bloomberg) -- One of the Federal Reserve's most senior officials and his incoming successor both said that overshooting the U.S. central bank's 2 percent inflation target for a time is nothing to worry about because the central bank has been below the goal for so long.

“I've said it many times: being a little above 2 percent after being below 2 percent for many, many years is not a problem,” New York Fed President William Dudley said Friday during an interview with Bloomberg Editor-in-Chief Emeritus Matthew Winkler.

That sentiment was echoed a short while later by John Williams, the current head of the Fed's San Francisco branch, who will replace Dudley next month.

“I am personally comfortable with the fact that inflation may overshoot that 2 percent for a while,” Williams said in an interview on CNBC. The central bank's emphasis on a “symmetric” target “is a signal to say that inflation will sometimes be above, sometimes below, but on average at 2 percent,” he added.

U.S. central bankers have been telegraphing their comfort with inflation above their target for the past several weeks. Williams and Dudley's remarks reinforce the message laid out earlier this week that policy makers won't accelerate interest-rate hikes planned for this year as they let the economy pick up steam even as inflation nears their goal.

Fed Calm Over 2% Inflation Underlines Gradual Rate-Hike Outlook

Forecasts released in March showed the high end of central tendency estimates for inflation in 2019 and 2020 at 2.2 percent.

The Fed's preferred gauge of inflation, the personal consumption expenditures price index, reached 2 percent in March on a 12-month basis after being below that level for most of the past six years. The core measure excluding food and energy prices rose 1.9 percent.

“Now that inflation is moving higher, they are shifting” to a message that “we can let it run hot for a while,” said Priya Misra, head of global rates strategy at TD Securities LLC. “The Fed doesn't want to be forced to hike at a faster pace.”

“I wouldn't quite declare victory yet” on consistently achieving the Fed's 2 percent inflation target, Dudley said. “The inflation data goes up and down month to month, but we have made some progress and I am certainly happy where we are today.”

U.S. central bankers left interest rates on hold at their meeting this week and gave no signal they would step up a gradual pace of monetary policy tightening that's penciled in three or four rate hikes this year, including their increase in March.

The Federal Open Market Committee's May 2 statement used the word “symmetric” twice in reference to its inflation goal, continuing a campaign by officials to emphasize that 2 percent isn't a hard ceiling.

“Given that inflation's been below our target for a number of years, I think it is important to reinforce that message that we think of 2 percent as the mid-point where we expect inflation to be,” Williams said.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Brendan Murray

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