Dudley Says Fed Still Likely to Raise Interest Rates in 2015

He said he is “becoming more confident” in the inflation outlook as oil prices have stabilized and the pace of appreciation of the dollar has slowed.

That too, however, depends on how the labor market evolves, he said. And even if the labor market does continue to improve, that by itself may not be sufficient.

“For example, if labor market improvement were not accompanied by a meaningful uptick in wage compensation and if inflation expectations also fell, then one likely would not be reasonably confident about inflation returning to 2 percent over the medium term,” he said.

Yellen’s Outlook

Yellen said on May 22 that she still expects to raise rates this year if the economy meets her forecasts. Those remarks were before government data showed the economy shrank by 0.7 percent at an annual rate in the first quarter.

Governors Lael Brainard and Daniel Tarullo earlier this week both questioned whether the first-quarter slump could be written off as due largely to temporary headwinds. The International Monetary Fund on Thursday cut its U.S. growth forecast for this year and urged the Fed to delay a rate increase to the first half of 2016.

Once the Fed has begun raising rates, it must also decide at what pace to slim down its balance sheet, which it more than quadrupled in size to $4.47 trillion during three rounds of bond buying aimed at holding down borrowing costs.

Answering questions from reporters after his speech, Dudley said he would like the Fed to have raised rates to a “reasonable level” before ending the reinvestment of maturing securities, which he said would amount to additional “tightening of monetary policy.” Some $215.5 billion of the Fed’s holdings mature in 2016. “But how far that is — you know, if it’s 1 percent, or 1.5 percent — I haven’t really reached any definitive conclusion.”