WRAPUP 1-Fed's Dudley sees mid-2015 rate hike as 'reasonable'

June 24 Tue Jun 24, 2014 4:22pm EDT

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June 24 (Reuters) - The U.S. Federal Reserve can reasonably wait to raise interest rates until mid-2015 without risking an undesirable rise in inflation, an influential Fed policymaker said on Tuesday.

"We think we can get the unemployment rate considerably lower and still not have an inflation problem," William Dudley, president of the New York Federal Reserve Bank, told a Puerto Rico accounting group. "We also don't have inflation at a level consistent with price stability."

In May, the U.S. jobless rate stood at 6.3 percent, the lowest level since the end of 2008 and unchanged from April. Inflation has been running below the Fed's 2 percent goal, although some recent readings have been firmer.

"The market expectations are that the Federal Reserve will start to raise short-term interest rates around the middle of 2015 -- that sounds to me like a reasonable forecast," Dudley said. "But, you know, forecasts often go astray."

Dudley, who as chief of the New York Fed holds a permanent vote on the U.S. central bank's policy-making panel, speaks from experience: over the past several years the Fed has been frequently overly optimistic about economic growth prospects and officials have had to repeatedly to mark down their forecasts.

At the same time the Fed has underestimated how quickly unemployment will drop; it now sees the jobless rate as approaching near normal levels later this year.

Dudley's comments, which often reflect dominant sentiment at the Fed, suggest the central bank is in no hurry to raise rates from their current near-zero level once it winds down its bond-buying stimulus later this year.

Traders of short-term interest rate futures currently peg June 2015 as the likely start of an expected gradual run of rate rises by the U.S. central bank.

Speaking at a separate event, Charles Plosser, the hawkish chief of the Philadelphia Fed, said he had "growing concerns that we may have to adjust our communications in the not-too-distant future. Specifically, I believe the forward guidance in the statement may be too passive."

Plosser's comments reflect concern among a minority at the Fed that the Fed may dally too long before raising rates, allowing inflation to spiral upwards out of control. Dudley on Tuesday made clear he did not share those concerns.

"In the current environment, it is still very, very appropriate to continue to follow a very accommodative monetary policy because we're making progress toward our objectives but we have not yet reached our objectives," Dudley said. (Reporting by Lisa Lambert and Howard Schneider; Writing by Ann Saphir; Editing by Leslie Adler)

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