U.S. economic growth faces fewer risks of a disappointment and the Federal Reserve is better positioned to avoid mistakes than in past episodes, Federal Reserve Bank of New York President William Dudley said Thursday.
The bright outlook for the economy means that the Fed is on track to raise short-term interest rates, Dudley suggested.
“Although patience is appropriate, if all goes well, I anticipate that we will begin to raise short-term rates sometime next year,” he said. “That would be a welcome development, because it would indicate that the U.S. economy has largely recovered from the damage caused by the housing boom and bust, and the financial crisis.”
Speaking at the Central Bank of the United Arab Emirates in Abu Dhabi, Dudley acknowledged that there have been too many overoptimistic forecasts that did not pan out in the years following the financial crisis, but assured investors that “this time, however, I believe that we are less likely to be disappointed.”
Dudley cited a number of “headwinds” boosting the U.S. economy that meant that growth was likely to be resilient over the next few years, including a favorable mix of spending and taxes, improving credit, and a booming energy sector.
The Fed itself is better prepared to avoid confusing markets about its plans for interest rates, Dudley added, acknowledging that his fellow Fed officials created turbulence in markets early last summer when then-chairman Ben Bernanke appeared to hint at an earlier end to the Fed’s bond-buying program than was expected at the time. Then, stock markets fell and yields on Treasury and mortgage-backed securities jumped up in reaction to the Fed’s communications.
“It is clear, in retrospect, that our attempts in the spring of 2013 to provide guidance about the potential timing and pace of tapering confused market participants,” Dudley said in prepared remarks.
“Lately, we seem to have done better,” Dudley added, explaining that the Fed has phased out the bond-buying program altogether without causing investors to think that an interest rate hike was imminent.
As the president of the New York Fed, which conducts the Fed’s monetary policy operations, Dudley is a permanent member of the Fed’s monetary policy committee. He is generally viewed as one of the members of the committee fairly closely aligned with Chairwoman Janet Yellen’s view of the economy and labor markets.
