william c dudley : the outlook for the us economy in 2018 and beyond remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the securities industry and financial markets association, new york city, 11 january 2018. * * * good afternoon. it is a pleasure to have the opportunity to speak with you at this event. today, i will focus on the economic outlook for 2018 and beyond. as always, what i have to say reflects my own views and not necessarily those of the federal open market committee ( fomc ) or the federal reserve system. 1 broadly speaking, the prospects for continued economic expansion in 2018 look reasonably bright. the economy is likely to continue to grow at an above - trend pace, which should lead to a tighter labor market and faster wage growth. under such conditions, i would expect the inflation rate to drift higher toward the fomc ’ s 2 percent long - run objective. over the longer term, however, i am considerably more cautious about the economic outlook. keeping the economy on a sustainable path may become more challenging. while the recently passed tax cuts and jobs act of 2017 likely will provide additional support to growth over the near term, it will come at a cost. after all, there is no such thing as a free lunch. the legislation will increase the nation ’ s longer - term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby - boom generation retires. while this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable. in the long run, ignoring the budget math risks driving up longer - term interest rates, crowding out private sector investment and diminishing the country ’ s creditworthiness. these dynamics could counteract any favorable direct effects the tax package might have on capital spending and potential output. favorable near - term outlook turning to the near - term outlook, the prospects appear favorable for another year of above - trend growth. consumer spending should continue to grow at a moderate pace, supported by solid fundamentals. household income is being bolstered by faster compensation growth and continued healthy employment gains. moreover, the aggregate household balance sheet remains in good shape, due in part to rising home prices, a strong stock market, and only moderate growth in household debt. over the past year, home prices have risen by about 7 percent on a national basis, and the

might be slightly — but not particularly — worried about is financial market asset valuations, which i would characterize as elevated. while valuations are noteworthy, i am less concerned than i might be otherwise because the economy ’ s performance and outlook seem consistent with what we see in financial markets. volatility in the real economy has been low, and this has been matched by low volatility in financial markets, which has helped support high valuations. i am also less worried because the financial system today is much more resilient and robust than it was a decade ago. thus, even if financial asset prices were to decline significantly — which presumably would occur if the economic outlook were to deteriorate — i don ’ t think such declines would have the destructive impact we saw a decade ago. higher capital and liquidity requirements for major banks have made the banking system more resilient and better able to absorb market shocks without this impairing its ability to intermediate credit flows between borrowers and savers. it was the collapse of confidence in the financial system in 2008 that caused credit availability to dry up, contributing greatly to the severity of the great recession. 7 so, what am i worried about? two macroeconomic concerns warrant mention. the first is the risk of economic overheating. now, this seems like an odd issue to focus on when inflation is low, but it strikes me that this is a real risk over the next few years. not only do we have an 4 / 6 bis central bankers'speeches economy that is growing at an above - trend pace — at a time when the labor market is already quite tight — but the economy will be getting an extra boost in 2018 and 2019 from the recently enacted tax legislation. moreover, even though the fomc has raised its target range for the federal funds rate by 125 basis points over the past two years, financial conditions today are easier than when we started to remove monetary policy accommodation. this suggests that the federal reserve may have to press harder on the brakes at some point over the next few years. if that happens, the risk of a hard landing will increase. historically, the federal reserve has found it difficult to achieve a soft landing — especially when the unemployment rate has fallen below the rate consistent with stable inflation. in those circumstances, the federal reserve has been unable to both push up the unemployment rate slightly to a level that is consistent with stable inflation and avoid recession. 8 now, i don ’ t want to imply that