Federal Reserve Bank of New York President William C. Dudley said investor expectations that the Fed may raise the main interest rate in mid-2015 may prove incorrect while appearing now to be “reasonable.”
“The market expectations are that the Federal Reserve will start to raise short-term interest rates around the middle of 2015,” said Dudley, who also serves as vice chairman of the Federal Open Market Committee. “That sounds to me like a reasonable forecast, but forecasts often go astray, so I wouldn’t put too much weight on that particular set of forecasts,” he said after a speech in San Juan, Puerto Rico.
Dudley’s remarks underline efforts by Fed Chair Janet Yellen to play down policy makers’ own forecasts for the first rate increase since 2006. Fed officials on June 18 predicted that the central bank’s benchmark rate would rise at a faster pace after an initial increase sometime next year.
“The world is highly uncertain,” Dudley said, declining to predict when the central bank may raise the rate. “In the current environment it’s still very, very appropriate to continue to follow very accommodative monetary policy.”
He said the Fed, while making progress, has yet to reach its goals of maximum employment and 2 percent inflation.
“We’ve said very clearly that what we are going to do depends on how the economy evolves,” Dudley said. Fed officials believe they can “get the unemployment rate considerably lower and still not have an inflation problem.”
The FOMC on June 18 repeated that it plans to keep the fed funds rate near zero for a “considerable time” after concluding a bond-buying program that’s on pace to end late this year.
U.S. stocks fell, reversing earlier gains, and Treasuries advanced amid concern over escalating violence in Iraq as investors gauged the strength of the global economy.
The Standard & Poor’s 500 Index fell 0.6 percent to 1,949.98 at the close of trading in New York. The yield on the 10-year Treasury note fell five basis points, or 0.05 percentage point, to 2.58 percent.
Fed officials last week predicted their target interest rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later. In March, they estimated the rate would rise to 1 percent by the end of next year and 2.25 percent at the end of 2016.
After the meeting, Yellen played down the significance of the rate forecasts, which are represented as dots on charts.
“Around each of those dots, I think every participant who’s filling out that questionnaire has a considerable band of uncertainty around their own individual forecast,” she said.
In a separate speech today, Philadelphia Fed President Charles Plosser predicted the job market will continue to improve and said he’s “fairly optimistic” economic growth will exceed 2.4 percent for the remainder of this year and next.
The expansion will probably slow to a 2.4 percent trend rate after 2015, Plosser, who votes on monetary policy this year, said to the Economic Club of New York.
“The rebound after the bad winter seems to be progressing, the outlook for unemployment is a bit better, and the inflation rate appears to be firming,” Plosser said. “Current data suggest economic strength is fairly broad-based, as witnessed by recent performance and the optimism expressed by firms in many manufacturing and service sectors.”