Trends and transitory shocks: remarks to the Money Marketeers of New York University, New York, New York, September 27, 2017

The weakness in inflation readings appears to be transitory, but some one-time declines in individual prices will not fall out of annual averages until next spring. In contrast, the recent hurricanes will likely place some upward pressure on measured inflation over the next several months, a transitory shock in the other direction. However, the declines in the unemployment rate below the level most see as sustainable seem likely to be more long-lasting, which is one reason for my expectation that tight ? and tightening further ? labor markets will result in higher wages and prices over time. Temporary fluctuations in prices may obscure the underlying trend for a little while. But monetary policy tends to act with long lags, so it is essential that central bankers do their best to look through the temporary toward the underlying trends. Those trends, as best I can see them at present, suggest to me an economy that risks pushing past what is sustainable, raising the probability of higher asset prices, or inflation well above the Federal Reserve?s 2 percent target. Steps lowering the probability of such an outcome seem advisable ? in other words, seem like insurance worth taking out at this time. As a result, it is my view that regular and gradual removal of monetary accommodation seems appropriate.