Fed's Dudley sees 'relatively slow' rate hike cycle

Tue May 20, 2014 4:08pm EDT
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By Michael Flaherty

NEW YORK (Reuters) - The Federal Reserve should be able to raise interest rates slowly when it eventually tightens monetary policy given that slack in the U.S. economy is restraining inflation, a top official at the central bank said on Tuesday.

New York Federal Reserve President William Dudley said the economy was poised for stronger growth and inflation should "drift upwards" towards the Fed's 2 percent goal. But a swift climb in inflation was unlikely, he said.

"My current thinking is that the pace of tightening will probably be relatively slow," Dudley told a group of business economists in New York. He also reiterated that the central bank would wait a "considerable time" after winding down its bond-buying stimulus program before raising rates from near zero.

Philadelphia Fed President Charles Plosser offered a more hawkish view during a speech in Washington, warning that the central bank risked waiting too long for a rate hike.

"As we continue to move closer to our 2 percent inflation goal and the labor market improves, we must be prepared to adjust policy appropriately," he said. "That may well require us to begin raising interest rates sooner rather than later."

Both Plosser and Dudley have votes on the Fed's policy-setting panel this year, but Dudley's views are considered to be more in the mainstream of thinking at the central bank.

The Fed is grappling with several major issues, including when to raise interest rates and when to start scaling back its more than $4 trillion balance sheet.

In a signal of a shift in the thinking at the central bank, Dudley said the Fed should consider continuing to reinvest proceeds from the bonds it holds until after it raises rates.   Continued...

William Dudley, President of the New York Federal Reserve Bank, speaks at Brooklyn College in the Brooklyn borough of New York, March 7, 2014. REUTERSKeith Bedford