Fed Dudley warning of sooner rate hike

August 1, AtoZForex – Fed rate hike topic is a hot issue currently, as there are some Federal Reserve (Fed) officials, supporting the rate hike necessity, and there are some opponents to that opinion. Apparently, the New York Fed President William Dudley believes that rate hike can appear sooner than expected.

Fed Dudley warning of sooner rate hike

William Dudley told a conference of central bankers and financial regulators:

“Market expectations, to my eye, derived from federal funds futures prices, which price in no more than one 25 basis-point rate hike through the end of 2017, … appear to be too complacent.”

Moreover, Mr. Dudley said he anticipated the US economy to develop around 2 percent annually over the next 18 months. He believes this can be boosted by enhanced consumption. William Dudley has commented:

“If the upcoming information validates my view of the outlook, then U.S. monetary policy will need to move at a faster pace than implied by futures prices to a more neutral posture as the labor market tightens further and U.S. inflation rises.”

Additionally, Mt. Dudley highlighted that the market did not appear to be giving much weight to the likelihood of the faster rate of economy growth. He mentioned:

“The risks to growth from Brexit and other international developments could fade away. If such events were to occur, this might necessitate an even faster pace of adjustment. It’s premature to rule out further monetary policy tightening this year. It depends on the data, broadly defined, and as we all know, that’s not something one can predict with any great accuracy.”

Fed takes “risk management approach”

As it appears, earlier last week the Federal Open Market Committee (FOMC) kept its overnight interest rate in the 0.25 percent to 0.5 percent range. Additionally, it highlighted the labor market “strengthening” and noted other indicators are promising the growth.

Also, FOMC statement had some negative insights, as inflation is “expected to remain low in the near term” and then go up as the decrease in energy prices turns and the job market continues to firm. William Dudley said that the medium-term risks to the US economy were “somewhat skewed to the downside.”

Following on this, Mr. Dudley said it was “broadly probable” for market expectations to move towards a flatter path for US rates. He also mentioned that the Fed takes “risk management approach,” and that “we need to be a bit more careful about the risk of tightening monetary policy in a manner that proves to be premature as compared to the alternative risk of being a little late.”

Mr. Dudley also said that if the Fed were late with the reaction to inflation risks, the policy could be adjusted by short-term rate hike more rapidly.

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