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Dudley Calls Forecast for Mid-2015 Rate Rise ‘Reasonable’

Forecasts for the Federal Reserve to raise interest rates in mid-2015 are “reasonable” as policy makers wait for unemployment to fall further and inflation to rise, New York Fed President William C. Dudley said.

“It still is premature to begin to raise interest rates,” Dudley said today in a speech in Troy, New York. “The labor market still has too much slack and the inflation rate is too low.”

Dudley said a strengthening dollar, weak foreign demand and strong domestic energy production are all holding down inflation, which remains below the Fed’s 2 percent target. “There still is a significant underutilization of labor market resources,” he said.

Dudley’s comments were his first since a report last week showed the unemployment rate unexpectedly fell to 5.9 percent and the economy added more jobs than forecast in September. The FOMC last month retained its pledge to keep rates low for a “considerable time” after it concludes its two-year asset purchase program this month.

“The consensus view is that lift-off will take place around the middle of next year. That seems like a reasonable view to me,” Dudley said.

Most Fed officials predict the Fed will raise the benchmark interest rate above zero sometime in 2015, according to forecasts published Sept. 17. The increase would be the first since 2006.

Growth Forecasts

Officials see growth of 2.6 percent to 3 percent next year, according to central tendency estimates, which omit the three highest and three lowest forecasts. That should help push unemployment down to 5.4 percent to 5.6 percent. They also forecast inflation to remain below their 2 percent goal.

Dudley spoke after the International Monetary Fund today cut its forecasts for global growth next year and warned about the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels.

Stocks tumbled and bonds rallied, sending yields to the lowest since May 2013, as the IMF cut its global outlook and German industrial production plunged.

The Standard & Poor’s 500 Index (SPX) fell 1.5 percent to 1,935.10 at 4 p.m. in New York, the lowest level since Aug. 12. The yield on 30-year Treasuries retreated eight basis points to 3.05 percent.

Responding to audience questions after his speech to the Rensselaer Polytechnic Institute, Dudley said the market for leveraged loans is “a bit frothy” and that the Fed is checking with banks to see how closely they are complying with guidance issued in 2013.

Twin Mandates

Minneapolis Fed President Narayana Kocherlakota today said policy makers have fallen short of their mandates for full employment and stable inflation and shouldn’t consider raising interest rates next year.

“Labor-market outcomes have been distressingly weak,” Kocherlakota said in a speech in Rapid City, South Dakota. “Monetary policy has proven to be insufficiently accommodative to offset either the price or employment effects of this large shock” from the recession.

Kocherlakota, who votes this year on the Federal Open Market Committee, cited the jobless rate falling “only gradually” to 5.9 percent from a 2009 peak of 10 percent, and the share of Americans who have a job rising “only slightly.”

The Fed tomorrow will release minutes of its Sept. 16-17 meeting, at which the central bank retained its “considerable time” pledge even as it outlined a strategy to exit from six years of unprecedented easing.