Fed's Dudley flags easy money now, rate rise around mid-2015

NEW YORK (REUTERS) - The Federal Reserve is not about to back off its highly accommodative policy, though investor predictions of a rate rise by midway through next year are reasonable, an influential US central banker said on Friday.

New York Fed President William Dudley outlined some bright spots in the long recovery from recession, calling US economic prospects "reasonably favorable." But Mr Dudley, a key Fed decision-maker alongside Chair Janet Yellen, stressed that the labor market is still hobbled, saying in a speech he would like to see faster economic growth and more rapid progress in lowering unemployment and raising inflation.

Mr Dudley did not comment specifically on the Fed's bond-buying policy. And while his comments on the economy were relatively upbeat, his still-dovish stance on policy reinforces the notion that the Fed is nowhere near ready to tighten after more than five years of near-zero interest rates.

The market generally expects the Fed to raise rates"sometime toward the middle of 2015," he said at Brooklyn College. "I think those are a very reasonable set of expectations based on what we know today, and our economic forecasts."

According to forecasts published in December, 12 of the Fed's 17 policymakers expect to start to tighten policy in 2015.

Two officials predicted the move would come this year, and three said not until 2016.

The Fed, tasked with obtaining maximum sustainable employment in the world's largest economy, has promised to keep rates low until well after U.S. unemployment falls below 6.5 per cent, as long as inflation stays in check.

The jobless rate rose to 6.7 per cent last month from 6.6 per cent in January, according to fresh data that also showed better-than-expected jobs growth last month.

Mr Dudley noted that most market participants who closely follow the Fed are expecting a rate rise when the unemployment rate falls to around 6 per cent.

The central bank is also buying US$65 billion (S$82.3 billion) in bonds each month to stimulate growth, though policymakers have trimmed the program twice and expect to wind it down before the year is through.

Mr Dudley, on a tour of the New York City borough, predicted sustained US growth above 2.25 per cent on the horizon, enough to boost the labor market. But he warned of "substantial underutilization" of both labor and capital resources.

"This implies, in turn, that the current, highly-accommodative stance of monetary policy will remain appropriate for a considerable time to come," Dudley told a small library auditorium of students and staff at the college.

The government report showed on Friday that the portion of Americans who either have a job or are looking for work held steady, despite a downward trend in this so-called labor force participation rate.

Mr Dudley said that while the aging of the population is playing a role in the drop, he expects more Americans to return to the workforce. "The decline of the unemployment rate significantly overstates the degree of improvement in the labor market," he said.

Asked about the unfolding crisis in Ukraine, the policymaker said the US central bank has people who are monitoring it and providing analysis for any possible fallout for the US economy.

"Exactly where it's going is not clear at this point," Mr Dudley said. "Obviously we hope that cooler heads prevail."

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