New York Federal Reserve President William Dudley is the latest Federal Reserve member to talk up interest rates. On Monday morning, Dudley was speaking on the macroeconomic outlook at the Association for a Better New York in New York City.

Dudley is president and chief executive officer of the Federal Reserve Bank of New York. As this is the New York Fed, he serves as the vice chairman and a permanent member of the Federal Open Market Committee (FOMC).

Dudley’s view is that the U.S. economy has been supported by solid gains in household spending and that it has expanded at a moderate rate in 2016. Job gains were referred to as “sturdy” with “some firming in wage growth” as the labor market has continued to tighten. While inflation may not yet be at the Fed’s 2.0% target, Dudley did note that the overall inflation rate has begun to move up closer to that objective. He also said that economic conditions are not far from the Federal Reserve’s dual mandate of maximum sustainable employment and price stability — and that the Fed likely will make further progress toward these goals in 2017.

Dudley does talk about the expectation for a gradual rate hike, but there are significant challenges over the longer term. While economic expansions don’t die of old age, and while there are few imbalances in the economy that could lead to the current expansion ending, Dudley pointed out that it is important that fiscal policy and monetary policy are well aligned going forward.

He also said that the United States needs to retain sufficient fiscal capacity so that fiscal policy can support the economy when the next cyclical downturn comes. Other challenges for the economy are that productivity growth has been anemic over the past few years, and that income inequality has increased and income mobility remains low.

After speaking further about positives and negatives in the economy, Dudley addresses the possibility of rate hikes:

If the economy grows at a pace slightly above its sustainable long-term rate, as I expect, the labor market should gradually tighten further, and the resulting pressure on resources should help push inflation toward our 2 percent objective over the next year or two.  Assuming the economy stays on this trajectory, I would favor making monetary policy somewhat less accommodative over time by gradually pushing up the level of short-term interest rates.

Dudley also addressed the long-term challenges of debt servicing costs. He sees that the Treasury’s debt-service costs likely will grow as interest rates rise and the amount of outstanding debt held by the public continues to increase. He said:

While net outstanding Treasury debt held by the public has risen to $14.2 trillion from $4.8 trillion over the past decade, annual debt-service costs have only increased very modestly.  Looking ahead, the CBO’s baseline projection is that debt-service costs will rise from 1.4 percent of GDP in fiscal 2016 to 2.6 percent of GDP in 2026.

Here were the views for federal funds rate hike chances being overwhelmingly for a rate hike at the December 14 FOMC meeting.

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