(Drops extra reference to "policy" in first paragraph)
March 1 (Reuters) - An influential Federal Reserve official on Thursday gave a somewhat hawkish definition of what has become the Fed's mantra of "gradual" policy tightening, saying that could mean four interest rate hikes this year in the face of fiscal stimulus.
New York Fed President William Dudley said he was gaining confidence that rate hikes would continue to be needed thanks to a boost from U.S. tax cuts and government spending that is turning fiscal policy "quite stimulative."
The comments briefly dampened stock markets and added to the notion the central bank could respond to hotter economic growth this year with a bit more monetary tightening. Fed forecasts from December pointed to three expected hikes this year, and traders give about a 30-percent chance of four hikes.
"If you were to go to four ... rate hikes I think it would still be gradual," Dudley said at a Sao Paulo conference. He noted that would be half as aggressive as the eight-per-year hikes the Fed executed last decade, which he called the "alternative to gradual."
In response to low unemployment but below-target inflation, the Fed hiked three times last year and has continued to telegraph that "gradual" path. Fed Chair Jerome Powell repeated that mantra in congressional testimony on Tuesday and Thursday.
Dudley, who plans to step down by mid-year, said the tax cuts and new spending caps announced late last year could boost the U.S. budget deficit to about 5 percent of GDP in 2019. While he said that is a longer-term risk, he said it also gives him "greater confidence" the economy will grow above trend and require further Fed rate hikes.
"The new piece is a pretty large move toward fiscal stimulus both in terms of the tax legislation and the increased spending caps," he said at Brazil's central bank. "Fiscal policy is in the process of turning quite stimulative so any worries you had about U.S. economic growth, which I think were already pretty subdued, I would think in the near term are even more subdued."
He referenced the addition of the word "further" in the Fed's January policy statement describing planned rate hikes and said that reflected this confidence.
(Reporting by Jonathan Spicer Editing by Chizu Nomiyama and Chris Reese)