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NY Fed's Dudley: Market raised questions about global economy

Market action in August has raised some questions about a slowing global economy for the second half of the year, a widely watched Fed official said Friday.

"I think the key question is, are we going to get sufficient growth in the economy, put downward pressure on the unemployment rate, get an acceleration in wages?" said William Dudley, president of Federal Reserve Bank of New York. "If we get that, I'll be reasonably confident in inflation returning to 2 percent."

Dudley, a voting member of the Fed and vice chairman of the Federal Open Market Committee, was speaking in an exclusive interview with CNBC.

He reiterated the central bank's commitment that every meeting should be "live," in which all economic data is parsed and assessed before a rate decision is made. Dudley said he still forecasts a rate hike this year, "but it's a forecast and we're going to get a lot of data between now and December, so it's not a commitment."

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He said that weaker global developments, particularly in China, could potentially slow the U.S. economy. A stronger dollar has also weighed on U.S. exports. "It's a mixed picture, the domestic side of the economy looks really good, some temporary drag from inventories and some more persistent drag from the trade sector," he said.

Dudley said he is not surprised by the increasing market volatility as the Fed gets closer to a liftoff.

"That doesn't have big implications for the economic outlook, so it shouldn't really concern us as Federal Reserve officials," he said.

In late September, Dudley said the Fed remains on track for a likely rate hike this year and could reach its inflation target next year, faster than many other policymakers anticipate. He had said that the first rise could come as soon as October on the heels of an improving economy.

The Fed delayed a rate hike at its September meeting in the face of uncertainty about the global economy, a market selloff in the U.S. and concern that inflation might fall further away from the central bank's 2 percent target.

The minutes from the Sept. 16-17 meeting released Thursday showed the Fed's policymaking committee was unsettled by signs of a global economic slowdown but didn't think this had "materially altered" the outlook for the economy.

The Fed thought the economy was close to warranting an interest rate hike in September but the FOMC decided it was prudent to wait for evidence a global economic slowdown was not knocking America off course.

— Reuters contributed to this report.