Fed's Dudley somewhat less confident of meeting inflation target

A key US rate-setter flagged increased risks that the central bank might no longer be on track to meet its medium-term inflation target.

Speaking in Hangzhou, China on Tuesday the president of the Federal Reserve bank of New York, William Dudley, said he was now more worried that the rate of price increases might fail to rise back to the Federal Reserve's 2.0% medium-term target.

Dudley and his Chinese counterparts also weighed in with their view on recent developments in global capital markets, such as the sometimes high levels of volatility and the pursuit of negative short-term interest rates by some central banks.

“On balance, I am somewhat less confident than I was before. Partly, this reflects my assessment that uncertainty to the outlook has increased and that downside risks have crept up,” the central banker said, according to prepared remarks for his speech.

In a rare joint conference with his Chinese counterparts, Chen Yulu, the deputy governor of the People’s Bank of China, warned that a stronger US dollar could roil emerging markets and called for the world’s major central banks to work more closely.

For his part, Dudley told his audience that “tighter financial conditions abroad do spill back into the US economy, and policy- makers must take this into account in their assessment of appropriate monetary policy."

Emerging markets were on the central bank’s radar, with developments on that front helping to inform the Federal Open Market Committee’s own decisions, he added.

“Of course, this does not mean that we will let market volatility dictate our policy stance. There is no such a thing as a ‘Fed put.’ What we care about is the country’s growth and inflation prospects, and we take financial market developments into consideration only to the extent that they affect the economic outlook,” Dudley said.

Nevertheless, Dudley would go on to add that he had only marked down his forecast for economic growth in the US this year “very modestly”.

The “overall outlook has not changed substantially,” he added.

He still expected gross domestic product would expand by around 2% this year, which would allow labour maker slack to be reduced further and stoke inflation.

China was making good progress on transitioning its economy away from exports, the US central banker. However, recent market turbulence had not been about what the Fed was doing, he added.

For his part, Chen urged developing nations pursuing negative interest rates to consider the consequences of their action, Bloomberg reported.