The market shouldn't be ruling out the possibility the Federal Reserve will hike interest rates again this year, William Dudley, president of the New York Fed, said on Monday.
"Market expectations, to my eye, derived from federal funds futures prices, which price in no more than one 25 basis-point rate hike through the end of 2017, … appear to be too complacent," he told a conference of central bankers and financial regulators on the Indonesian island of Bali.
Dudley said he expected the U.S. economy to grow around 2 percent annualized over the next 18 months, boosted by improved consumption.
"If the upcoming information validates my view of the outlook, then U.S. monetary policy will need to move at a faster pace than implied by futures prices to a more neutral posture as the labor market tightens further and U.S. inflation rises," Dudley said.
Additionally, Dudley noted that the market didn't appear to be giving much weight to the possibility that the economy could grow faster than expected.
"The risks to growth from Brexit and other international developments could fade away. If such events were to occur, this might necessitate an even faster pace of adjustment," he said.
"It's premature to rule out further monetary policy tightening this year. It depends on the data, broadly defined, and as we all know, that's not something one can predict with any great accuracy," he said.
Last week, the Federal Open Market Committee kept its overnight interest rate target in the 0.25 percent to 0.5 percent range, but noted that the labor market had "strengthened" and said other indicators were pointing to growth.
The Fed last hiked its overnight rate in December after keeping it anchored near zero for seven years.
On the downside, the FOMC statement noted that inflation remains mired and is "expected to remain low in the near term" and then rise as the decline in energy prices turns and the labor market continues to strengthen.
Dudley said on Monday that the medium-term risks to the economy were "somewhat skewed to the downside."
For that reason, he said it was "broadly appropriate" for market expectations to shift toward a flatter path for U.S. interest rates.
He noted that the Fed takes a "risk management approach," and that "we need to be a bit more careful about the risk of tightening monetary policy in a manner that proves to be premature as compared to the alternative risk of being a little late."
But he noted that if the Fed were to be late in responding to inflation risks in the economy, policy could be adjusted by raising short-term interest rates more quickly.
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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1