He gave a muted assessment of the labour market just before the Fed's June meeting, expressing worries about whether US employers could continue their rapid hiring amid weak output data.
Speaking on Friday, Mr Dudley said the data since then have made him "less worried about the labour market piece". He declined to reveal his personal forecast for when the Fed will first lift rates, indicating it was perfectly possible the central bank will wait until December before moving.
"If we hit 2.5 per cent growth in the second quarter and it looks like the third quarter is shaping up for something similar, then I think you are on a firm enough track that you would imagine you would have made sufficient progress in our two tests [for a rate hike], certainly by the end of the year," he said.
"It would not shock me if we decided to lift off in September, or it wouldn't shock me if the data were a little softer and it caused us to wait."
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A 15 per cent surge in the trade-weighted dollar has dragged on trade data and on inflation, complicating the Fed's rates deliberations. However Mr Dudley argued that as long as the dollar and oil prices have now stabilised, these will be "transitory influences" that will drop out of the inflation picture a year from now.
While analysts see risks of further gains in the dollar given the Fed is planning to tighten policy even as other central banks loosen, that policy divergence is to some degree already priced into markets, Mr Dudley added.
"The divergence of economic performance between the US and Europe and Japan to my mind has actually narrowed a bit," he said. "Seems to me like most of the news coming out of Europe and Japan is that they are actually experiencing cyclical recoveries."
That said, Mr Dudley warned that the financial market implications of a Greek exit from the euro could be graver than many investors seemed to believe, because it would set a "huge precedent" indicating that euro membership was reversible.
People "underestimate all the different channels in terms of how contagion works," the central banker said. "We saw that in the financial crisis. People did not anticipate that the Lehman failure was going to affect the economy and financial markets to the degree that it did."
The Fed has been guiding investors that its rate hikes will come at a "gradual" pace as it seeks to avoid a repeat of the 2013 "taper tantrum", in which yields spiked sharply on the back of signals of reduced stimulus from former Fed chairman Ben Bernanke.
Mr Dudley suggested his definition of "gradual" was lifting rates at around half the pace in the Fed's 2004-07 hiking cycle, when they rose a quarter point at every meeting — but he stressed that the statement was not a "commitment in any way" by the Fed. "Our expectations will evolve in light of the incoming economic information."
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He stressed that he still saw "significant headwinds" facing the US economy, downplaying any suggestion that the Fed was behind the curve in tightening monetary policy amid strong labour market indicators.
"The economy doesn't have terrific forward momentum," he said. "It doesn't look like the excess slack in the labour market is going to be used up really quickly."
Mr Dudley also dismissed arguments in favour of hiking rates to tackle possible bubbles in asset prices brought about by ultra-low rates. "At this juncture we don't see the kind of excesses that make us greatly concerned," he said.
With investors debating the likely market reaction to an eventual Fed hike, Mr Dudley said a new taper tantrum-style spike in yields in response to Fed plans was a more imminent worry than a repeat of the so-called conundrum in the early 2000s, when financial conditions failed to respond to Fed tightening.
Over the longer term, if yields failed to budge the Fed could easily lift rates faster if needed to lift market rates, he argued. He did not rule out active management of the Fed's multi-trillion dollar balance sheet to tighten monetary conditions.
Some time after starting to hike rates, the Fed plans to allow its holdings of bonds to run down "on autopilot" as securities mature. "That is our current expectation; I don't think that means we are locked in forever," said Mr Dudley. "If we thought that there was a better set of policies that could lead to better outcomes I think we could modify that in the future."