New York Federal Reserve President William Dudley said on Thursday he expects a 2% pace of economic growth in the second quarter after a slowdown in the first three months of the year, and anticipates further tightening in U.S. monetary policy.
Dudley’s comments came during a question-and-answer session at an economic press briefing at the New York Federal Reserve Bank in Lower Manhattan.
On the heels of his remarks, U.S. equity markets steepened their intra-day declines as the Dow Jones Industrial Average sank nearly 200 points, while the broader averages erased their year-to-date gains. Meanwhile, the U.S. dollar ticked higher against a basket of global currencies, while the yield on the benchmark 10-year U.S. Treasury bond slipped 0.036 percentage point to 1.847%. Yields move inversely to prices.
Minutes from the central bank’s April meeting, released on Wednesday afternoon, showed policymakers were more confident on the state of the U.S. economy during the two-day meeting period. Citing continued improvement in economic data including steady strength in the labor market and rising inflation pressures, the Fed said higher rates were not out of the question at the Federal Open Market Committee’s next meeting on June 14 and 15.
Dudley, who has traditionally taken a more dovish stance when it comes to monetary policy, reiterated that stance in his remarks Thursday, but said any decision on moving rates higher depends on continued improvement in the economic data.
“We’re on track to satisfy a lot of the conditions we need to see to continue the monetary policy tightening process,” he said. “I think we’ve been pretty clear in recent weeks that further tightening is likely this year.”
Expectations for a rate hike in June as shown by Fed Funds futures, a gauge that represents the market’s views on the likelihood of changes in monetary policy, rose to 35% after the minutes were released, but ticked lower to 26% on Thursday on the heels of Dudley’s remarks. By July, markets predict a 51% chance of a least one rate rise, and a 63% chance by September.
Torsten Slok, chief international economist at Deutsche Bank, said in a note Thursday that while expectations for tighter monetary policy have increased in the last two days, he questions whether they’re high enough given the sudden hawkish tone the central bank has adopted in its communication.
He said further public appearances by Fed officials will become even more critical in the weeks leading up to the June FOMC meeting.
“The hawks have tended to give more speeches than doves, so it will be interesting to hear if we get confirmation of the hawkish message from the more dovish members…[including Federal Reserve Chair Janet] Yellen next week,” he said.
While Dudley said he expects higher rates as early as this summer, he noted there are some looming risks to that outlook including the so-called Brexit vote that comes just a week after the Fed’s June meeting. At that time, citizens of Great Brittan will take to the polls for a referendum about whether their nation should terminate its membership in the European Union.
Dudley said that looming vote could weigh on the Fed’s decision-making process in June.
“The possibility of [a Brexit] event could have consequences for financial-market conditions. We’ll have to think about that, we’ll have to weigh up that risk,” he said.
Still, Dudley said concerns that caused financial-market uncertainty in the first three months of 2016 have subsided as oil prices have recovered and worries about the stability of the global economy and China’s role in the slowdown, have waned.