US Fed official optimistic on economic outlook

But Federal Reserve Vice Chair Randal Quarles said it is too soon to say the economy is at a turning point, and while he acknowledged the possibility growth could accelerate, he seemed less concerned about the threat of inflation.

“I am fairly optimistic about the current state of the economy,” Quarles said in a speech to business economists, adding that “it has been quite some time since the economic environment has looked as favorable as it does now.”

Whether the US economy can sustain the faster pace will depend on whether the “factors that have been holding back growth for the past decade diminish, including weak investment and productivity.”

But there are encouraging signs that businesses are finally starting to boost investment, which could be helped by the recent corporate tax cuts, he said.

The Fed was expected to raise the benchmark lending rate three times this year, but many economists now think four increases are more likely.

Quarles simply said he expects “further gradual increases in the policy rate will be appropriate.”

In a nod to the concerns that have roiled global stock markets this month, amid fears rising wages will drive inflation and prompt the Fed to more aggressively raise the key interest rate, Quarles the inflation threat will depend on the driving factors.

“It might seem reasonable to assume that faster growth would lead to firmer inflation. However, I think a lot remains to be seen,” he said, adding that “the degree to which growth spurs inflation is likely to be determined by the underlying factors that are prompting the increase in growth.”

And expansion driven by rising demand is likely to have a greater effect on prices that increasing the potential for growth through investments that improve the economy’s productive capacity.

“Growth led by an increase in the economy’s productive capacity, either through increased labor force participation or higher productivity growth, is likely to impart less upward pressure on prices,” he said.

But he acknowledged that there now are “some upside risks” to the economic outlook.

As employment has increased steadily, creating difficulties for companies trying to fill open positions, “is likely that tightness in labor markets will eventually show up in wages and prices.”

The absence of inflationary pressures over the past year has mystified Fed officials, but Quarles said that “mostly reflects idiosyncratic and transitory factors,” which he expects to fade, allowing inflation to move back to the central bank’s two percent target “over the next year or so.”