New York Fed governor - William Dudley - said that the market should not eliminate the possibility that US Federal Reserve System (Fed) will raise interest rates this year.
In a press conference on 1sth August in Bali between Fed officials and financial managers, Mr. Dudley said that the market is too complacent as forecasting the Fed will raise interest rates by 25 basis points from today until the end of 2017.
Thanks to improved consumption, Mr. Dudley expects the US economy will grow at a rate of 2% in the next 18 months.
If the coming information reinforces economic outlook, US monetary policy will need faster moves than the price in the future to neutralize the market because the labor market tends to tighten and the inflation increases.
In addition, Mr. Dudley also noted that the market has underestimated the ability that no.1 economy grows faster than forecast.
The risks affecting growth such as the UK to leave the European Union (EU) and other international moves will soon ease. If the events, which have a negative impact, happen, Mr. Dudley said the US economy will require a faster growth rate than people expect.
Mr. Dudley supposed that this time is too early to exclude the possibility of tightening monetary policy further in 2016. It depends on the data, and no one can predict precisely.
In last week's policy meeting, the Federal Open Market Committee (FOMC) - who are directly responsible for the monetary policy of the Fed - have decided to keep interest rates unchanged at 0.25 to 0, 5% although they admitted the job market has been strengthened and other indicators also showed growth.
The last time, when Fed raised interest rates in December last year, is also the first time as they raised interest rates from nearly 0% for almost a decade.
On the other hand, in their statement, FOMC said inflation has not shown signs of growth yet and as the forecast, this situation will last. Chairman Janet Yellen and her colleagues noted that inflation will only increase as the energy prices retreat and the job market continues to grow.
Mr. Dudley said that the medium-term risks to the US economy tend to decrease in near future.
For that reason, he suggested that the market may believe that the Fed will likely stick plans to raise interest rates two times as their plan launched earlier.
According to the governor, Fed is adopting a risk management approach and they were prudent with the risks of tightening fiscal policy. Although the market supposes that Fed is cautious too early, but they decided to choose this method to not have to deal with the later discovered risks.
However, the Fed was slow to react to inflation risks. Inflation policies may be adjusted by increasing short-term interest rates quickly.