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 "At this moment, I judge that the balance of risks to my growth and
inflation outlooks may be starting to tilt slightly to the
downside," New York Federal Reserve President William Dudley said in
remarks at a conference in Hangzhou, China sponsored by the People's
Bank of China and the New York Fed.
Although he said he still expects the U.S. economy to grow about 2
percent this year, enough to push unemployment down and begin to
pull inflation up to the Fed's 2-percent target, he added, "on
balance, I am somewhat less confident than I was before."
The Fed raised U.S. interest rates in December for the first time in
almost a decade, and signaled that it would probably raise rates
four more times this year, a gradual pace by historical standards.
The U.S. central bank in December raised its target range for its
benchmark policy rate by one quarter of a percentage point, and
currently aims to keep the rate between 0.25 percent and 0.5
percent.
Dudley, a close ally of Fed Chair Janet Yellen and a permanent voter
on U.S. monetary policy, suggested that the sharp global economic
slowdown, stock-market sell-off and oil price slide since the
beginning of the year may force the Fed to tighten monetary policy
even more slowly.
The Fed put markets on notice for just such a possibility in
January, saying it needed more time to assess global developments
and their effect on the U.S. economy before offering an assessment
of the balance of risks to the outlook.
For Dudley, the jury now appears to be in. With turbulence in global
financial markets reflecting mixed economic signals, the risks
appear to have increased, and though so far he has left his outlook
largely unchanged, continued tightening in financial markets "could
potentially lead to a more significant downgrade to my outlook."
Of particular concern, he said, were falling inflation expectations,
as tracked both by market pricing and more importantly in his view,
by surveys of households. While so far the declines were not
dangerously large, if they fell further they could make it more
difficult for the Fed to bring inflation back up to its goal.
The Fed next meets in mid-March to consider monetary policy, and is
widely expected to leave rates unchanged.
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STRONG DOLLAR, CHINA
In a question-and-answer session following his speech, Dudley said
the December rate hike was justified.
He said the relative strength of the dollar was a factor in the
Fed's decision-making in general, although the U.S. central bank did
not have "an objective" for the greenback.
He noted that the dollar had appreciated "quite a bit" in recent
months, adding: "a lot of that seems to be well justified by where
we are on the economic cycle and the monetary policy cycle".
Asked about China's transition away from investment and export-led
growth toward consumption, Dudley said he thought Beijing was on the
right course.
"Obviously, this is difficult to manage because it's a big, complex
economy so I would not be surprised if there were a few bumps...but
I think that I'm quite optimistic that this transition can be
managed," he said.
(Reporting by Li Zheng, Sun Qizi, John Ruwitch and Pete Sweeney in
China, and Ann Saphir in San Francisco; Editing by Diane Craft and
Jacqueline Wong)
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