expectations that the federal reserve will raise interest rates at its december policy meeting have grown recently, fueled by the reaction in financial markets to donald trump <u+2019>s victory in the u.s. presidential election. neil king, global economics editor at the wall street journal, sat down with fed governor daniel tarullo to discuss the postelection landscape and what it might mean for the economy and monetary policy. edited excerpts follow. a full transcript of the conversation also is available. mr. king: what is just your basic sense of the strength of the u.s. economy? mr. tarullo : we<u+2019>ve had an unusual recovery from what was obviously a very unusual recession, one driven by a financial crisis, rather than by the normal pattern of inflation moving up and the fed hitting the brakes. and during that period, we<u+2019>ve never had what people call the nike recovery, where there is a very steep upward trajectory. instead, growth has been modestly above trend for some time. my perspective for a couple of years now had been that there was more room to run. there was more slack in the labor market. there was more utility in getting demand strengthened by having incomes up and more people having jobs. and we weren<u+2019>t really close to our inflation target and hadn<u+2019>t been for some time. but over the last three or four months, i<u+2019>ve seen changes in that pattern. core inflation is up some. after a long period of relatively little wage growth, at least one of the measures has shown some upward movement. and we<u+2019>ve seen the actual labor-force participation rate approach, and by some measures maybe even slightly exceed, the expected trend of labor-force participation. all of that has suggested to me that we<u+2019>re in a somewhat different situation than i thought we were six or eight or 10 or 12 months ago. and so now, i think the discussion of when is the appropriate time to raise rates to prevent the economy from overheating too much is more on the table than it may have been before. that said, there are some grounds for caution. we still have fewer tools to respond if a recession were to come from some external source than we do ability to control inflation. there is still some slack in the labor market, although not as much as before. we obviously don<u+2019>t want to be pushing on the brakes harder than we need to in order to continue the trend of moderate growth. mr. king: one of the fed<u+2019>s mandates is maximum employment. the unemployment rate is now at 4.9%. what would you consider to be maximum employment? how low might that number go? mr. tarullo: well, that<u+2019>s actually the point. i don<u+2019>t think we know in real time what the natural employment rate is right now. the unemployment rate has been around 5%, give or take, for over a year now, during which time we<u+2019>ve been creating at least twice<u+2014>and in some months three or more times<u+2014>as many jobs as are needed to deal with new entrants into the labor force without pushing up inflation. that suggested to me that there was a good bit of slack in the labor market, something i think in retrospect has proven to be true. suppose in 2015 or even 2014 in anticipation of full employment at around 5%, we had taken several interest-rate moves. i think almost surely, we would have given up some of the benefits of that job creation, which has benefited those who didn<u+2019>t profit as much from the early part of the expansion. that includes lower-income workers, african-americans, hispanics and others that traditionally have higher unemployment rates. we would have lost something. so i think the real answer is we don<u+2019>t know. and that<u+2019>s why i<u+2019>ve taken the position we should proceed pragmatically, look at the data on inflation and look and see what<u+2019>s going on in labor markets. and then, at an appropriate moment, take the next step and then sit back and say, <u+201c>ok, what impact has that had?<u+201d> mr. king: the new administration is talking about a sort of republican version of stimulus that would include tax cuts, repatriation of corporate profits, some kind of burst in infrastructure spending and possibly other spending, without a huge amount of concern, at least in the short term, for the debt. how might that change the fed<u+2019>s outlook? mr. tarullo: fiscal policy is one of the important background considerations in thinking about the appropriate monetary policy to achieve the dual mandate of maximum employment and price stability. so we obviously are sensitive to the impact that fiscal policy has. but i want to emphasize, it is to the impact . it isn<u+2019>t to an expectation. let<u+2019>s give the new administration time to actually get its program and for congress to decide what it<u+2019>s going to do. and then the fed will react appropriately to the impact of that in the economy. mr. king: you voted for the rate increase last december. the anticipation now is that there will be one next month. to what extent can you outline what you see rate policy as being, not just in december but through next year? mr. tarullo: well, i can only speak for myself here, and i don<u+2019>t want to comment on any particular meeting. i think the important issue is actually the one that your question identifies, which is what is the policy? and as i said, i think the policy now ought to be one in which we respond to the incoming data. at this juncture, i think it<u+2019>s probably more likely that the next response would be a tightening rather than more accommodation. and then given the trajectory that we<u+2019>ve been on for some time now, i think at that juncture, we watch carefully to see what the impact of that presumed rate increase would be. remember, monetary policy operates with a lag. mr. king: there was a lot of talk about dodd-frank during the campaign. and there<u+2019>s now some presumption that the republican majority will go after it in some fashion. do you have concerns about it being dismantled? mr. tarullo: just like with fiscal policy, i don<u+2019>t want to speculate as to what may happen. obviously, if changes are made, we will implement faithfully whatever changes the congress makes. write to reports@wsj.com
the economic view of a fed governor - wsj
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