The Federal Reserve could potentially raise interest rates as soon as next month, New York Fed President William Dudley said, warning investors that they are underestimating the likelihood of increases in borrowing costs.
“We’re edging closer towards the point in time where it will be appropriate, I think, to raise interest rates further,” Dudley, who serves as vice chairman of the rate-setting Federal Open Market Committee, said Tuesday on Fox Business Network. Asked whether the FOMC could vote to raise the benchmark rate at its next meeting Sept. 20-21, Dudley said, “I think it’s possible.”
Investors expect about one rate hike between now and the end of next year, according to federal funds futures contracts, and they marked up probabilities only slightly on Tuesday. Dudley said such estimates are “too low” and that “the market is complacent about the need for gradually snugging up short-term interest rates over the next year or so.”
“We are looking for growth in the second half of the year that will be stronger than the first half,” Dudley said. “I think the labor market is going to continue to tighten, and in that environment I think we are getting closer to the day where we are going to have to snug up interest rates a little bit.”
The FOMC left interest rates unchanged when it met last month, but said in a post-meeting statement that “near-term risks to the economic outlook have diminished.” The Fed will publish minutes of that meeting Wednesday at 2 p.m. in Washington.
While U.S. stocks rose to another record high on Monday, the New York Fed chief said he didn’t see any signs of asset bubbles that are “particularly disturbing.” At the same time, the bond market “looks a little bit stretched,” in part because major central banks are “creating a search for yield globally” through their bond-buying programs, he said. That demand is spilling over to the U.S., where Treasury yields are higher than in Japan, Germany and the U.K.