Fed's Dudley: Rates to rise gradually, outlook unchanged

Interest rates will continue a gradual climb, and the outlook has not changed significantly since the last Federal Reserve policy meeting, a top Fed official said Friday amid a new sell-off in stocks.

In prepared remarks in New Jersey, New York Federal Reserve President William Dudley reiterated the central bank's point that future rate increases will depend on economic data. But he noted that recent indicators have been disappointing, adding that global economies pose a risk to the United States.

"In terms of the economic outlook, the situation does not appear to have changed much since the last FOMC meeting," he said. "Some recent activity indicators have been on the softer side, pointing to a relatively weak fourth quarter for real GDP growth."

The text of the speech was released as stocks swooned on Wall Street. (Click here for the latest prices.)

Dudley, a voting member of the Fed's policymaking board, also said energy prices and a strong dollar have raised the risk that the Fed's 2 percent inflation target won't be met. But he contended that core inflation looks stable despite energy.

William Dudley of the Federal Reserve Bank of New York.
Andrew Harrer | Bloomberg | Getty Images
William Dudley of the Federal Reserve Bank of New York.

Dudley's remarks come as market uncertainty and low oil prices have tempered expectations for how quickly the central bank will normalize interest rates. The Fed raised short-term interest rates at its December meeting for the first time in more than nine years, and suggested it would raise rates four times this year.

Still, Dudley contended that the labor market looks strong, and he believes unemployment will further decline in 2016. He also sees growth of slightly more than 2 percent for the year.

Dudley noted that inflation would rise once pressure on energy prices subsides and the dollar stops rising relative to global currencies.

He highlighted job creation and consumer spending as economic strengths. But Dudley noted that a decline in energy sector capital spending and weakness in the manufacturing sector were causes for concern.

Answering questions after the speech, he said negative interest rates were a potential policy tool, but noted he was not seriously considering them.

He also said U.S. community banks posed little systemic risk relative to large banks.

Reuters contributed to this report.