Federal Reserve Bank of New York President William Dudley said Tuesday the U.S. central bank can likely hold off on raising short-term interest rates until 2015 given the expected path of the economy.
"It still is premature to begin to raise interest rates--the labor market still has too much slack and the inflation rate is too low," Mr. Dudley said. But he added "the consensus view" that the Fed will lift its interest rate target off of the current near-zero level by the middle of next year "seems like a reasonable view to me."
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That said, Mr. Dudley, who also serves as vice chairman of the monetary policy-setting Federal Open Market Committee, also said that the path of central bank policy isn't fixed. "What we do will depend on the flow of economic news and how that affects the economic outlook.
"Firmer growth, higher inflation, and a more rapid tightening of the labor market could cause us to move earlier. Conversely, should economic growth disappoint, the timing of lift-off could be pushed later," Mr. Dudley explained.
But Mr. Dudley suggested that it is unlikely the economy will heat up in a way that causes the Fed to chart a more aggressive path than most currently expect. "There still is a significant underutilization of labor market resources," he said, despite clear progress in mending the job market.
More broadly, he said "the likelihood that growth will be substantially stronger than the point forecast is probably relatively low."
Mr. Dudley's comments came from the text of a speech prepared for delivery before the Rensselaer Polytechnic Institute in Troy, N.Y. The official spoke in the wake of Friday's release of hiring data for September. That report showed considerable strength in the labor markets and a decline in the jobless rate to 6%.
The sustained uptick in hiring has driven a debate over the timing of interest-rate increases and the language the central bank uses to communicate its intentions. The Fed is currently set to end its bond-buying stimulus program this month--Mr. Dudley affirmed this is still likely--and most officials expect the first increase in rates to come next year. Core central bank decision makers favor the middle of 2015, but a number of others think economic strength could drive the Fed to act earlier in 2015.
Mr. Dudley suggested he sees no urgency to act at a time where the job market still has some way to go and inflation is tame. He said in his speech that a government forecast that price pressures will reach 1.9% by the end of 2015 relative to the Fed's official target of 2% is "quite reasonable."
What's more, the drivers of rising inflation aren't really there. Mr. Dudley sees little threat wages will push price pressures up. "The appreciation of the dollar and weakening of foreign growth prospects" in addition to low energy prices will collectively "dampen inflation pressures," he said.
Mr. Dudley noted "the appreciation of the dollar is likely due in part to increasing confidence that growth prospects in the U.S. have improved," and as such, is a positive vote in favor of the American economy.
He acknowledged that financial markets may have some challenges adjusting to Fed rate increases. If the economy proves strong enough to boost rates, that would be "good news, even if it were to cause a bump or two in financial markets."
Write to Michael S. Derby at Michael.email@example.com
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