Fed's Dudley Concerned About Downside Risk on U.S. Inflation

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The drop in oil prices and a strong dollar have raised the risk of U.S. inflation expectations heading lower, hampering actual inflation from reaching the Federal Reserve's 2 percent goal, a Fed official said on Friday.

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"With respect to the risks to the inflation outlook, the most concerning is the possibility that inflation expectations become unanchored to the downside," New York Federal Reserve President William Dudley said in a prepared speech.

Dudley was speaking at an event sponsored to the New Jersey Bankers Association.

Market-based measures of inflation expectations have weakened significantly in recent days with the collapse in oil prices, which plunged below $30 on Friday. The so-called breakeven inflation expectations on 10-year Treasury Inflation Protected Securities, or TIPS, were at their lowest since late August.

Some surveys also pointed to a softening in inflation expectations, including the University of Michigan's measure of the long-term consumer inflation outlook which is near the bottom of its range in the past 20 years.

The New York Fed's own gauge on consumer inflation also softened in the past year, falling to 2.8 percent going out three years.

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Although he has been mindful of the decline in inflation expectations in recent months, Dudley said it was not enough to stop the Fed's move away from its near-zero interest rate policy.

"As long as the economy continues to grow at an above-trend pace, I expect the increase in resource utilization will be sufficient to push both inflation and inflation expectations higher over time," he said.

The Fed raised U.S. policy rates for the first time in nearly a decade in December.

Dudley also noted prices outside of energy and food prices have remained stable.

Despite concerns about disinflation, Dudley said he expects the U.S. economy to grow slightly above 2 percent in 2016 with a bit more tightening in the labor market.

He also downplayed the concerns that some analysts and investors have raised about the world's largest economy slipping into recession amid uncertainty about China and global market turbulence since the start of the year.


(Reporting by Richard Leong; Editing by Meredith Mazzilli)