NY Fed banker sees interest rate hike soon

New York's top banker said Thursday U.S. economic conditions "could soon" satisfy the Federal Reserve's criteria for raising interest rates.

"The economy looks to be in decent shape, and is likely to continue to grow at a slightly above-trend pace," William Dudley, president of the Federal Reserve Bank of New York, told an economics group in Manhattan. He is vice chairman of the Fed's interest-rate-setting committee.

Dudley also denied the assertions of some Republican presidential candidates that the timing of a rate hike would be tied to the election cycle. "No way," he said. "We're going to do what we think is appropriate . . . with no eye on the political season whatsoever."

The Fed has kept short-term interest rates near zero percent since December 2008 to spur recovery from the severe 2007-09 recession. Consumers and businesses spend more when the cost of borrowing is low.

Dudley said the U.S. housing and job markets are performing well, easing fears that a rate hike by the Fed's Federal Open Market Committee will throw the economy into recession again.

"I think it is quite possible that the conditions the committee has established to begin normalizing monetary policy could soon be satisfied," he told more than 700 people at a meeting of The Economic Club of New York.

However, he stopped short of saying whether he would vote to raise rates when the committee meets next month.

He also said the pace of interest-rate changes "will be quite gradual" to avoid destabilizing the economy.

"I see the risks now of moving too quickly versus moving too slowly as nearly balanced," he said.

Three other Fed bank presidents, in speeches in different cities Thursday, said the central bank should move slowly in raising rates.

"It is critically important to me that when we first raise rates, the [committee] also strongly and effectively communicates its plan for a gradual path for future rate increases," said Charles Evans of the Federal Reserve Bank of Chicago.

He predicted short-term interest rates would still be below 1 percent by the end of 2016.

In Manhattan, Dudley noted the Fed committee met 17 times in 2004-07 and hiked rates every time. He doubted the committee would do the same this time around.

While optimistic about the overall economy, Dudley did express concern about low inflation -- below the Fed's target of 2 percent -- the strong U.S. dollar and slow growth in some foreign countries.

Still, he said it would be unwise to hold off raising interest rates. "I don't favor waiting until I sort of see the whites in inflation's eyes," Dudley said, responding to an economist's question.