Premature US rate hike the bigger risk for Fed, Dudley says

[ABU DHABI] Hiking interest rates too early poses "considerably greater" risks for the Federal Reserve than moving too late, an influential Fed official said on Thursday in a strong defense of the US central bank's patient approach to tightening policy.

New York Fed President William Dudley said official readings of inflation should ease over the next few months as a result of falling US gasoline prices and as the dollar firms. He repeated that the Fed may want to let the economy run slightly hot to help long-time unemployed Americans finally find jobs.

As the central bank approaches its first rate rise in nearly a decade, expected some time next year, Mr Dudley's speech in Abu Dhabi reinforced the tendency of Chair Janet Yellen and the Fed's other core decision-makers to do so with caution.

With the Fed's key rate near zero, a "premature tightening might lead to financial conditions that are too tight, resulting in a weaker economy and an aborted lift-off," said Mr Dudley. That "would harm the Fed's credibility and, more importantly, would be difficult to rectify," he said in prepared remarks to the Central Bank of the United Arab Emirates.

US unemployment has fallen sharply to near a normal level at 5.8 per cent, and economic growth has been strong most of this year. But inflation has held below a 2-per cent Fed target the last few years, muddling the timing of a rate rise.

A dovish policymaker who often reflects Ms Yellen's views, Mr Dudley downplayed recent soft market-based inflation readings, saying survey-based readings are superior and remain well-anchored. He also downplayed part of the Fed's October policy statement that said rates will stay low for a "considerable time," arguing Fed policy will react to how the economy evolves. "Unemployment is too high and inflation is too low," he said. "Thus, monetary policy needs to be very accommodative in order to close these gaps," he added, including what he called a "meaningful gap" between the current rate of joblessness and a stable longer-term rate.

REUTERS