Fed’s Dudley urges caution on rate hikes, cites risks to US

Central bank governors have little power to improve “disappointing productivity” in the United States and around the world, New York Federal Reserve President William Dudley said on Monday.

In an otherwise dovish speech to a joint New York Fed-Bank Indonesia conference in Bali, he said it was possible that the USA economy would outperform expectations through year end, that financial conditions ease, or that other worldwide risks fade.

The Fed kept its benchmark overnight interest rate in a range of 0.25 per cent and 0.5 per cent.

“For these reasons, I think it is premature to rule out further monetary policy tightening this year”, he said in prepared remarks for the speech at a resort hotel.

Mr. Dudley warned some traders were putting insufficient weight on the potential for near-term rate rises and said futures prices indicating the Fed will only be raise another quarter of a percentage point before the end of 2017 appeared “complacent”.

In the meantime, according to the UK’s Office for National Statistics, the country’s GDP growth picked up at a faster pace in the second quarter of 2016 amidst the “Brexit” vote.

Chair Janet Yellen and her colleagues have been watching for evidence of how headwinds from overseas, including fallout over Britain’s decision to leave the European Union, will affect US hiring and progress in lifting inflation toward their goal of 2 percent.

Mr. Dudley attributed changing market bets partly to the Fed holding interest rates steady for longer than many expected.

“So 2 percent growth is probably a pretty satisfactory outlook”.

Clearly, the Fed opened the door to an interest rate increase later this year, possibly as early as September, after a policy meeting at which officials concluded the economy is on more solid footing and risks to the outlook have diminished.

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The Fed last hiked its overnight rate in December after keeping it anchored near zero for seven years.