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[NEW YORK] The Federal Reserve will probably raise interest rates later this year and tighten policy gradually thereafter, New York Fed President William C. Dudley said, echoing the sentiment of Chair Janet Yellen that an uncertain global outlook won't postpone liftoff into 2016.
"The economy is doing pretty well," Mr Dudley said Monday at an event hosted by the Wall Street Journal in New York. "My expectation is that we probably will raise interest rates later this year." Mr Dudley said he expected growth in the second half will be a little bit weaker than in the first half, when the US grew around 2.25 per cent on an annualised basis.
His remarks lined up with Yellen, who said Sept. 24 she felt it likely the Fed would increase rates this year for the first time in almost a decade. The policy-setting Federal Open Market Committee decided Sept 17 to hold rates near zero, citing worries over the slowdown in China that could damp US growth and inflation. "Barring any significant change in the outlook, the Fed is telling us they plan to hike rates later this year," Bricklin Dwyer, economist with BNP Paribas in New York, wrote in a note to clients.
Mr Dudley, who cautioned in late August that the uncertain global outlook made the case for a rate increase in September less compelling, said his expectation on the timing of liftoff was "not calendar guidance. It depends on the data. That's based on my view of how the economy is likely to evolve." That includes developments abroad, particularly in China, where slowing growth has sapped commodity prices, which is helping to suppress US inflation.
Concern over the outlook for the world's second-largest economy have roiled financial markets since China's surprise currency devaluation on Aug 11. Investors have reduced their bets the Fed would act at one of its two remaining FOMC meetings this year and saw a 40 per cent probability of a move by the Dec 15-16 FOMC, down from 49 per cent on Sept 21.
The Fed has held rates near zero since late 2008 to boost the economy through the worst recession since the Great Depression. Yellen last week discussed allowing US unemployment to fall under the level that Fed officials estimate to be full employment to draw more workers back into full-time employment.
She also emphasised the Fed would tighten gradually once it had begun to raise rates, and Mr Dudley repeated that assurance.
"We are going to go quite slowly," he said, citing forecasts submitted by policy makers for the Sept 16-17 FOMC. These had a median projection for the benchmark federal funds rate of 1.4 per cent at the end of 2016, rising to 2.6 per cent at the close of the following year.
"The reason we are going to go quite slowly, we think, is because the economy is not really that strong and monetary policy probably isn't quite as easy as people think it is, just judging by the level of short-term interest rates," Mr Dudley said.
Unemployment in the US has fallen to its lowest level in more than seven years, making it harder for the Fed to justify interest rates near zero. Inflation, however, has remained well below the Fed's 2 per cent target. It was 0.3 per cent in the 12 months through August, as measured by the Fed's preferred gauge of price pressures.
Chicago Fed President Charles Evans, who favors delaying liftoff until next year to make sure inflation is definitely heading back up to the Fed's 2 goal, also said the Fed was getting ready to raise rates.
"We're getting a lot closer to liftoff. Even in my own projections, where I have mid-2016, we are getting closer," he told reporters after delivering a speech Monday in Milwaukee. "We've made a lot of improvement on the labor market."