Fed's Dudley Expects a Rate Increase This Year -- 2nd Update

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NEW YORK -- Federal Reserve Bank of New York President William Dudley said Friday a rate rise is getting closer, while noting any actions that follow in 2017 will happen slowly as the central bank tests how far the job market can go without creating inflation problems.

"We are moving ever so slowly toward a point in time where we are going to tighten monetary policy," Mr. Dudley said in an interview with The Wall Street Journal. "I think if the economy continues to evolve along the path we expect, I'd expect we'll be raising interest rates relatively soon."

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Mr. Dudley said "I would expect this year" action will happen when it comes to increasing the 0.25% to 0.50% central bank overnight target rate range. But he declined to say which of the two meetings -- in early November or mid-December -- where the probable boost in borrowing costs will happen.

"Every meeting is a live meeting," Mr. Dudley said. But he cautioned "it's not like if we wait a meeting or don't wait a meeting, it has huge consequences for the trajectory of the economy."

Markets need to understand what the Fed is trying to accomplish with a rate rise, the official said. "No one is talking about tightening monetary in a way to bring this expansion to a close. All we are talking about is potentially removing a little bit of the accommodation we have in place today, making monetary policy slightly less accommodative as we get closer to full employment," Mr. Dudley said.

Many in financial markets see the Federal Open Market Committee meeting in December as the most probable time for action, believing the November meeting occurs too close to the presidential election.

In the interview, Mr. Dudley was upbeat about the economy but underscored the uncertainties policy makers face, amid questions about how far the job market can improve before altering inflation levels and about long-term growth and interest-rate levels.

That makes providing longer-run guidance difficult. Market participants "would like us to have more certainty, but I don't think that is possible," Mr. Dudley said.

"The world is a very complex place, and the U.S. economy is very complicated," he said. As for the actions the Fed is likely to take in 2017, Mr. Dudley allowed "the odds are the policy path will be gentle," but he wouldn't predict how many rate rises might be appropriate, as some of his colleagues have done.

Mr. Dudley was interviewed following the release of minutes from the Fed's September FOMC meeting that described officials' decision then to hold off on a rate increase as a close call. Three Fed officials dissented in favor of boosting rates, and on Thursday, Philadelphia Fed chief Patrick Harker, who doesn't have an FOMC vote this year, said he also wanted to see a rate increase last month.

Mr. Dudley, who serves as vice chairman of the FOMC, is a close ally of Chairwoman Janet Yellen. He long has been one of the Fed officials most reluctant to raise rates given tepid inflation pressures, in an economy that has been adding jobs at a strong enough clip to draw back workers who had given up on finding employment. Right now, he sees no conflict between the Fed's mission to promote job growth while keeping inflation stable.

"When the economy is growing just a bit above trend, the labor market's tightening only slowly and inflation is below your 2% objective, there's not a lot of urgency to tighten monetary policy quickly," he said.

Mr. Dudley said now would be a good time to re-evaluate the help other government policies could offer in the event of an economic downturn, as the Fed isn't likely to raise rates as high as they have been historically, echoing a theme emerging in other Fed officials' comments.

"One thing I think would be worthy of study is whether maybe we ought to bolster the automatic fiscal stabilizers," Mr. Dudley said. For example, Congress could create automatic payroll tax cuts that are tied to a given increase in the unemployment rate as a way to provide stimulus to the economy.

"That would provide support for the economy, people would know it was coming as the recession was unfolding, and that would make them more optimistic the recession would be mild rather than severe, and that could actually help support economic activity," Mr. Dudley said. The key is to make it "hard wired" so that it can be a predictable response to economic problems, he said.

Write to Michael S. Derby at michael.derby@wsj.com