A top Federal Reserve official said on Tuesday he does not know when interest rates will rise, but he tempered that uncertainty by applauding an apparent consensus between markets and the U.S. central bank that it will happen later this year.
William Dudley, president of the New York Fed and a close ally of Fed Chair Janet Yellen, mostly repeated recent comments that the policy tightening will depend on the U.S. economy. It will likely affect global capital flows and foreign exchange markets, he said, but should not be too surprising to investors.
"To be as direct as possible: I don't know when this will occur," Dudley, a dovish policymaker, said in prepared remarks to a monetary conference in Zurich.
He later applauded improved communications by the U.S. central bank, saying: "Market participants now seem to share" policymakers' individual forecasts "that lift-off is likely to begin sometime later this year."
Those average forecasts, from March, suggest the Fed will raise rates twice before year-end. While economists generally predict modest hikes in September and again in December, futures traders do not expect the Fed to tighten until December or later.
Dudley, who has a permanent vote on policy, had been flagging a rate hike by mid-year but, in recent months, he backed off that prediction as the economy slowed through winter. Last month he said he was hopeful the Fed would move this year.
After 6-1/2 years of near-zero interest rates, the Fed's liftoff is expected to ripple through financial markets globally. Dudley said it "will have implications for global capital flows, foreign exchange valuation and financial asset prices even if it is mostly anticipated when it occurs."
While he sounded optimistic the Fed can pull off a relatively smooth rate hike, he warned that the more than $10 trillion in asset purchases by central banks globally "have dramatically shrunk the size of bond risk premia globally."
This affects markets "in a different way compared to changes in short-term interest rates, and we should be humble regarding what we claim to understand about this distinction," he added.