Federal Reserve Bank of New York President William Dudley said any spending and tax changes from the incoming administration of President-elect Donald Trump should focus on measures that lift the productive capacity of the U.S. economy.
“The type of fiscal stimulus probably does matter in terms of how you think about its impact on the economy and its potential impact on inflation over the medium term,” Dudley told reporters in New York on Friday.
Dudley’s remarks come a day after Fed Chair Janet Yellen cautioned lawmakers about the inflationary impact of loosening fiscal policy with unemployment at or near its lowest sustainable level and federal debt as a proportion of gross domestic product already high.
Unemployment, which peaked following the financial crisis at 10 percent in 2009, has declined to below 5 percent. Inflation, while remaining below the Fed’s 2 percent target, has ticked up in 2016. The Fed’s preferred gauge of prices, excluding food and energy, rose 1.7 percent in the 12 months through September.
Trump has promised significant tax cuts and up to $1 trillion of new spending over a decade on infrastructure, plus additional money for defense.
Yellen also urged members of Congress to focus fiscal efforts on raising productivity, a theme that Dudley echoed.
“Infrastructure spending would presumably increase the efficiency and productivity of the economy, so I think that would certainly be a worthwhile undertaking,” Dudley said.
Asked if Trump’s goal of 4 percent annual GDP growth was achievable, Dudley said that would require boosting productivity to levels not seen since the late 1990s.
“It’s possible, but that was a pretty unusual period,” Dudley said.
Yellen has called productivity growth “the key determinant of improvements in living standards.” Since 2010, it’s averaged 0.6 percent in the U.S., compared with 2.3 percent from 1948 to 2009, according to the Bureau of Labor Statistics.
Earlier on Friday other Fed officials also struck a similar tone.
“The infrastructure program, done properly, could provide some public infrastructure that could improve U.S. productivity and drive medium-term growth,” James Bullard, president of the St. Louis Fed, said in an interview with Bloomberg Television. “Some kind of tax reform that would repatriate profits from overseas, that could increase U.S. investment and U.S. growth.”
Robert Kaplan, head of the Dallas Fed, said in an interview with Fox Business Network that the U.S. needs a broad policy approach for tackling persistent sluggish growth, including infrastructure investments and measures to offset the effects of an aging labor force.
In other remarks, Dudley took aim at the protectionist policies touted by Trump during the election campaign and warned against dismantling the 2010 Dodd-Frank Act, the Obama administration’s central regulatory response to the 2008-09 financial crisis.
“Most economists, almost all economists, think that having relatively open trade is beneficial to economic growth and economic performance over time,” Dudley said.
On financial rules he said, “It would be a big mistake to go to the pre-financial crisis set of regulations that we had in place. If there are aspects of Dodd-Frank that could be improved, that’s completely reasonable for Congress to take on board.”