Dudley still sees risks to U.S., cautious on rate hikes

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[April 08, 2016]  BRIDGEPORT, Conn. (Reuters) - The Federal Reserve must approach further rate hikes cautiously and gradually because of lingering external risks to the U.S. economy, despite some strength and welcome signs of inflation at home, an influential Fed official said on Friday.

In a speech that carefully weighed overseas threats to the U.S. economy against expectations of further domestic growth, New York Fed President William Dudley said risks are "slightly" tilted to the downside.

The broader committee of Fed policymakers, after raising interest rates for the first time in a decade in December, has left policy unchanged and failed to define this key "balance of risks" in its statements. With early-year market turmoil having calmed, some Fed officials have said another hike could come in the next couple of months.

"I judge that a cautious and gradual approach to policy normalization is appropriate," said Dudley, a close ally of Fed Chair Janet Yellen and a permanent voter on policy.

Caution, he added in a dovish tone, is needed "because of our limited ability to reduce the policy rate to respond to adverse developments, recognizing that we could also use forward guidance and balance sheet policies to provide additional accommodation if that proved warranted."

After a weak first quarter of growth, Dudley said he expects the economy to expand at about 2 percent this year, with unemployment falling to about 4.75 percent from 5 percent now.

"Although the downside risks have diminished since earlier in the year, I still judge the balance of risks to my inflation and growth outlooks to be tilted slightly to the downside," he said at University of Bridgeport.

Low oil and commodity prices "may signal more persistent disinflationary pressures than I currently anticipate, while renewed tightening of financial market conditions could have a greater negative impact," Dudley said, while "there is significant uncertainty about economic growth prospects abroad."

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

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