The Federal Reserve should be cautious on interest rate increases due to lingering risks to the U.S. economy, one of its most influential policymakers said on Monday, appearing to signal the chance of a hike by the end of the year was fading.
While New York Fed President William Dudley said it was “premature” to rule out a policy tightening in 2016, he added that negative shocks were more likely than positive ones due to the unknown fallout from Britain’s vote to leave the European Union and a strong dollar.
“All three of these reasons – evidence that U.S. monetary policy is currently only moderately accommodative, the fact that U.S. financial conditions have been influenced by economic and financial market developments abroad, and risk management considerations – argue, at the moment, for caution in raising U.S. short-term interest rates,” said Dudley, a close ally of Fed Chair Janet Yellen and a permanent voter on U.S. policy.
The comments, including a reference to uncertainty around the Nov. 8 U.S. election, suggested the central bank is leaning toward standing pat on rates until perhaps December – which would mark one year since it raised rates for the first time in nearly a decade.
Dudley applauded recent investor expectations for a less aggressive U.S. tightening cycle going forward, and warned that it was becoming increasingly clear that some post-crisis “headwinds” were likely to be permanent.
In an otherwise dovish speech to a joint New York Fed-Bank Indonesia conference in Bali, he said it was possible that the U.S. economy would outperform expectations through year end, that financial conditions ease, or that other international risks fade.
“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.
If the economy and labor markets improve quickly, Dudley said, the Fed would react by raising rates sooner.