Fed’s Dudley Urges Caution on Rate Hikes, Cites Risks to U.S. Economy

By Gayatri Suroyo

NUSA DUA, Indonesia – A prominent member of the Federal Reserve indicated on Monday that the central bank should exercise caution regarding interest rate increases due to ongoing risks to the U.S. economy. This statement suggests that the likelihood of a rate hike occurring by the end of the year is diminishing.

William Dudley, the President of the New York Fed, remarked that while it is "premature" to exclude the possibility of a policy tightening in 2016, he believes the chances of negative economic shocks are more prevalent than positive ones. These concerns stem from uncertainty regarding the ramifications of Britain’s Brexit decision and the strength of the U.S. dollar.

Dudley outlined three main reasons for exercising restraint on short-term interest rate increases: the current moderate stance of U.S. monetary policy, the influence of international economic conditions on U.S. financial markets, and considerations surrounding risk management. As a close ally of Fed Chair Janet Yellen and a consistent voter on policy matters, his stance carries significant weight.

During his remarks — which included a nod to the uncertainty surrounding the upcoming U.S. election on November 8 — Dudley signaled that the Federal Reserve might prefer to keep rates unchanged until December, marking one year since rates were first increased after nearly a decade.

He acknowledged the market’s shift towards expectations of a less aggressive tightening cycle and cautioned that some post-crisis "headwinds" could remain long-term.

In a largely dovish address at a conference in Bali, Dudley noted the possibility that the U.S. economy might outperform expectations by year-end, potentially leading to smoother financial conditions or a reduction in international risks.

Dudley also stated that if the economy and labor markets showed rapid improvement, the Fed could respond by raising rates sooner than anticipated. He added, "If that all happens very quickly, I can definitely see the Fed raising interest rates even prior to the election possibly. But if that all happens very slowly, then we’re going to go very slowly."

While he refrained from specifying the number of rate hikes he foresees, Dudley mentioned he anticipates the Fed will act more decisively than the current market predictions, which suggest only one rate increase by the end of 2017.

Despite a recent confident tone in the Fed’s policy statements, data indicating an annual growth rate of around 1 percent in the U.S. economy has led many to believe that the central bank is unlikely to tighten monetary policy imminently.

A recent poll of economists identified the December policy meeting as the most likely timing for a rate increase. However, following weak economic growth data, futures markets reflected only a 30 percent likelihood of a rate hike by December, down from roughly 50 percent earlier in the week.

Dudley characterized the recent GDP growth of 1.2 percent for the second quarter as "sluggish," yet he maintained an optimistic outlook for a rebound to approximately 2 percent growth over the next 18 months. He expressed confidence that inflation would reach the Fed’s 2 percent target in the medium term.

He also noted that aggressive monetary easing by Japan and Europe this year has strengthened the dollar, which has contributed to the Fed’s more cautious approach compared to its projections from December.

Dudley commented on disappointing productivity levels both domestically and globally, emphasizing that it is the responsibility of governments and legislatures to implement the necessary reforms to enhance economic efficiency.