Bloomberg
WASHINGTON (MarketWatch) — Tighter financial conditions and the drop in oil and other commodity prices are starting to look like they could lead to slower growth and weaker inflation, said William Dudley, the president of the New York Fed, on Tuesday, suggesting he remains cautious about raising interest rates in the near future.
In remarks to a conference in Hangzhou, China, Dudley said he has so far marked down his growth forecast only modestly to about 2%, with the unemployment rate still declining to about 4.75%. He said he still believes inflation will gradually return to the Fed’s 2% target.
Still, recent developments raised uncertainty, he said.
“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,” Dudley said.
“The recent tightening of financial market conditions could have a greater negative impact on the U.S. economy should this tightening prove persistent, and the continued decline in energy and commodity prices may signal greater and more persistent disinflationary pressures in the global economy than I currently anticipate,” he said.
The New York Fed president denied he was motivated to protect investors from trading losses in financial markets.
“There is no such thing as a Fed put,” Dudley said, referring to a security that protects investors from price declines.
“What we care about is the country’s growth and inflation prospects, and we take financial market developments into consideration only to the extent that they affect the economic outlook,” he said.
Dudley said he was also worried about declines in both market and survey measures of longer-term inflation.
“However, these developments merit close scrutiny, as past experience shows that it is difficult to push inflation back up to the central bank’s objective if inflation expectations fall meaningfully below that objective. Japan’s experience is cautionary in this regard,” he said.
Most economists think the Fed will hold interest rates steady at their policy meeting on March 15 and 16, the second straight meeting with no action after the historic move to raise rates from zero last December.
At their meeting in January, Fed officials declined to even signal their risk assessment for the economy. Dudley is a voting member of the Fed’s policy committee.
