A top Federal Reserve policymaker said Monday that he was hopeful the central bank will raise its benchmark short-term interest rate this year despite recent weak economic data.
William C. Dudley, president of the Federal Reserve Bank of New York, said he expected a slowdown in growth in the first quarter of this year "will prove to be largely temporary" and a bounceback would set the stage for the first rate hike since 2006.
"The winter weather was quite severe in the eastern two-thirds of the United States and bottlenecks at the West Coast ports disrupted both sales and production," Dudley said in a speech at the Bloomberg Americas Monetary Summit in New York City, explaining the reasons why he thinks the economy expanded at just a 1.5% annual rate from January through March.
The economy's "underlying fundamentals" remain solid and growth in 2015 should be close to the pace of the last two years, he said.
With the unemployment rate expected to continue falling and consumer spending to pick up, Dudley said the economic data in coming months should support a move by the Fed to raise the interest rate from the near 0% level it has remained at since late 2008.
"When, hopefully, the data support a decision to lift off later this year, it does not mean that U.S. monetary policy will be tight," Dudley said. "Rather, we will simply be moving from an extremely accommodative monetary policy to one that is only slightly less so."
Dudley is a voting member of the policymaking Federal Open Market Committee, which could decide to increase the interest rate as early as June.
Fed officials appeared on track to do that after their March meeting, in which the word "patient" was removed from the committee's policy statement regarding how it would approach an interest rate increase.
But a disappointing report on March job growth and other weak data recently have led to speculation Fed policymakers might wait until September or even until next year to raise the interest rate, which is a benchmark for other rates throughout the economy.
Dudley said he was confident the Fed could raise the interest rate without roiling financial markets and reducing access to credit in a still-recovering economy.
"If financial market conditions do not tighten much in response to higher short-term interest rates, we might have to move more quickly to achieve the appropriate restraint on financial market conditions," he said. "In contrast, if financial conditions tighten unduly, then this will likely prompt us to go much more slowly or even to pause for a while."
The long-run target for the interest rate probably is lower than in the past, Dudley said. He estimated it would be 3.5%, but added "I place considerable uncertainty on this estimate."