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BUSINESS
Federal Reserve System

Fed's Dudley: Rate hikes' pace tied to markets

Paul Davidson
USA TODAY
New Federal Reserve chief William Dudley said the pace of Fed rate hikes will largely depend on the response of financial markets to the increases.

The pace of Federal Reserve interest rate hikes will largely depend on financial markets' response to the increases, New York Federal Reserve president William Dudley said Monday.

"If financial market conditions do not tighten much in response to higher short-term interest rates, we might have to move more quickly," Dudley said in a speech at the New Jersey Performing Arts Center in Newark. "After all, the point of raising short-term interest rates is to exert some restraint on financial market conditions."

Conversely, he added, "If financial conditions tightened unduly, then this will likely cause us to go much more slowly or even to pause for a while."

Dudley is a voting member of the Fed's policy-making Federal Open Market Committee. For months, financial markets have bet the Fed will raise its benchmark rate — which has been near zero since the 2008 crisis — later than the time frames estimated by Fed policymakers. That suggests investors don't believe the economy or inflation will pick up as much as Fed projections.

Based on their median March forecast, the Fed officials expect an initial hike in September, with unusually low inflation prompting them to push back their forecast of an initial increase in June. The policymakers also expect the rate to rise slowly by historical standards, about a percentage point each year.

Some economists and analysts are nervously awaiting the Fed's first hike, fretting it will hobble stocks as investors shift funds to the climbing yields of bonds. But Dudley said, "in my view, it would be a cause for celebration, because it would signal that (the Fed's policymaking committee) believes that slightly higher short-term interest rates are consistent with the objectives of maximum employment and price stability."

Although the Fed's preferred measure of annual inflation rose only 0.3% in February, Dudley said "my expectation is that inflation will begin to firm later this year" as the effects of low oil prices fade.

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