Fed exec downplays inflation fear

Despite recent spikes in prices for gasoline and food, inflation is unlikely to dampen the U.S. economic recovery, a top banker said today.

William C. Dudley, chief executive of the Federal Reserve Bank of New York, downplayed fears of inflation, saying it remains in check. However, he also said the Fed would not hesitate to raise interest rates if prices seemed to be getting out of hand.

Dudley, one of the most powerful Fed governors, sits on the interest-rate setting Federal Open Market Committee.

In his 50-minute presentation at New York University's Stern School of Business, Dudley was upbeat about recovery from the recession. "The economic outlook has improved considerably," he told the audience of students, alumni and journalists.

However, Dudley also said hiring remains sluggish and unemployment is likely to remain too high through next year. "We will need to see sustained employment growth," he said. "Even if we were to generate growth of 300,000 jobs per month (nationwide), we should still likely have considerable slack in the labor market at the end of 2012."

Asked about potential damage to the U.S. economy from oil prices rising due to Middle East turmoil, Dudley said the Fed should "not to overreact to near term events in the Middle East." However, he acknowledged worries about oil supplies and price spikes could fuel inflation "that would make our jobs more difficult...We will have to wait and see what happens. We shouldn't make strong judgments today." 

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