Federal Reserve Governor Randal Quarles voiced confidence in the U.S. economy in a speech Friday and said more interest rate hikes likely will be appropriate, countering the prevailing market wisdom.
Speaking to economists in New York, Quarles, who is the central bank's vice chair for supervision, said the labor market looks strong and productivity is improving. At the same time, he was largely dismissive of recent data that showed a slowdown in nonfarm payrolls creation and weak consumer spending.
"In regard to policy, I am very comfortable remaining patient at this point and monitoring the incoming data," he said, echoing the Fed's most recent policy statement. "That said, my sense is that further increases in the policy rate may be necessary at some point, a stance I believe is consistent with my optimistic view of the economy's growth potential and momentum. In the language of central banking, my estimate of the neutral policy rate remains somewhat north of where we are now."
The remarks come nine days after the policymaking Federal Open Market Committee voted to hold rates steady and indicated that no additional increases are likely this year.
However, in recent days several Fed officials have said that talk about rate cuts is premature. Current market pricing is for the first cut to come as soon as September, with about a 25 percent chance of another decrease before the end of 2019.
The Fed's policy funds rate is currently set in a range between 2.25 percent and 2.5 percent. Quarles' belief that the "neutral level" that is neither stimulative nor restrictive on growth is significant. When Fed Chairman Jerome Powell said in October that the FOMC was "a long way" from neutral, it set off a violent sell-off on Wall Street.
President Donald Trump, who nominated Quarles, has been harsh on the Fed, saying the pattern of rate hikes, including four in 2018, have hampered an otherwise strong economy.
Quarles acknowledged that "growth has slowed, at least temporarily," as shown in recent data.
"That said, I remain optimistic about the outlook for the U.S. economy, and I think that we have the potential to maintain growth at a healthy pace in the years ahead," he said.
"Looking past the near-term data, I see many reasons to expect relatively strong growth in the coming years, supported by gains in the productive capacity of the economy," he added.
The comments were to the Shadow Open Market Committee, a group of economists who monitor Fed activity and gather to recommend policy approaches.
While veering from the notion that the Fed is on indefinite hold, Quarles said the central bank should be data dependent in its decision-making. However, he qualified that by saying that it shouldn't make decisions based on only isolated metrics.
"I prefer a framework where we make it clear that we are focused on broad trends--elsewhere I have used the aviation analogy that we should not 'chase the needles' on the instrument panel. We should be clear that, while we will respond to clear and durable evolution in these broad trends, we are not reacting to every piece of volatile data," he said.