Federal Reserve

Negative rate talk 'premature,' economy fine: Dudley

Dudley: Key sectors of US economy in good shape

Key components of the U.S. economy remain healthy, and recent speculation about the Federal Reserve adopting negative interest rates is "extraordinarily premature," a top Fed official said Friday, amid mounting concerns about slowing growth.

"If things were to turn in a surprising direction and the outlook in the U.S. were to deteriorate sharply, I think there are a lot of things that we would do long before we would really think about moving to negative interest rates. So to me, that's not really something that should be part of the conversation right now," New York Fed President William Dudley said in response to a question following the release of the bank's household debt and credit report.

Dudley said monetary policy remains "quite accommodative" after the Fed's decision to hike interest rates in December. Policy has only "limited" ability to respond to volatility with rates already low, he said.

Dudley, a voting member on the Fed's policymaking committee, spoke a day after Fed Chair Janet Yellen wrapped up two days of testimony to Congress. She faced several questions about whether the Fed would follow its counterparts in Europe in Japan to adopt negative interest rates, and left open the possibility that the Fed could do so. However, she noted that the Fed would first need to judge whether it would be appropriate.

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

Concerns about a U.S. recession and recent market turmoil have put the Fed under a microscope. The has shed about 10 percent of its value this year, while U.S. crude oil and the U.S. 10-year Treasury note yield have plunged more than 27 percent each.

Dudley took an optimistic stance on the economy despite market volatility. He repeated Yellen's statement that economic expansions do not "die of old age."

However, he said inflation continues to lag behind the Fed's 2 percent target amid "weakness" in commodities prices. While he said that international developments will "factor into" the policy decision at its March meeting, he did not definitively say which policy course he favored.

Federal Reserve Board Chair Janet Yellen testifies on Capitol Hill in Washington, Thursday, Feb. 11, 2016.
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He argued that the financial system looks "clearly stronger" than before the financial crisis, with a better capitalized banking system. The household sector is healthier, as well, he said.

"The household sector looks much better positioned today than in 2008 to absorb shocks and continue to contribute to the economic expansion," Dudley said.

He highlighted trends in household debt, including that delinquencies fell in the fourth quarter to 5.4 percent, the lowest since 2007. Still, household debt rose by $51 billion in the quarter, with student loan, auto and credit card debt all climbing.