The head of the New York Federal Reserve said he expects improving employment and a weaker dollar will put upward pressure on month-over-month inflation data, keeping the central bank on track toward tightening monetary policy this year.
"This is not a complex story," William Dudley, president of the N.Y. Fed said at a presentation on regional wage inequality on Aug. 10.
Though market participants focus on year-over-year inflation, Dudley noted that recent soft data will keep those figures lower for a time.
"Sequentially, we'll see more upward pressure than we've seen over the past four months," he said.
In prepared remarks, Dudley said that the Fed's "outlook anticipates a continued moderate growth trend, with some further strengthening in the labor market and an increase in inflation over the medium term toward our objective of 2%."
The Federal Open Market Committee has raised its benchmark federal funds rate twice to its current range of between 1.00% and 1.25%. It has also published a plan to reduce the $4.5 trillion in assets on its balance sheet, a move expected to push interest rates higher.
Market participants expect the Fed to announce that it will begin reducing its balance sheet at its September meeting and raise rates one more time this year, possibly in December.
Policymakers remain concerned about the strength of the economy, Dudley said, noting that annual GDP growth had averaged "just 2.1% since mid-2009," with wage growth "comparatively modest" as unemployment declined to 4.3%.
Several indicators suggest that the Fed's path toward rate hikes may run into obstacles.
The Producer Price Index for July fell 0.1%, the U.S. Department of Labor said Aug. 10, the first time it had dropped since August 2016. In June it was up 0.1%.
"This morning's producer price report suggests further downward momentum in costs at the same time the Fed continues to anticipate an additional removal of accommodation," Stifel Chief Economist Lindsey Piegza said in a research note.
Piegza concluded, however, that "[o]nly a severe and sizable slowdown in inflation will likely be enough to sway the Fed from their current trajectory."