William Dudley, president of the Federal Reserve Bank of New...

William Dudley, president of the Federal Reserve Bank of New York. Credit: AP

Despite increases in the cost of gasoline and food, inflation is unlikely to undermine the slow U.S. economic recovery, New York's top banker said Monday.

William C. Dudley, president of the Federal Reserve Bank of New York, downplayed fears that inflation has gained ground recently, saying prices were still relatively stable. He also said the Fed would not hesitate to raise interest rates should prices appear to be getting out of hand.

However, that's not expected as "short-term interest rates are likely to remain unusually low for an extended period," Dudley said.

So, the cost of borrowing money to purchase a home, car or other big-ticket items will probably remain near zero, where the Fed set interest rates more than two years ago. Dudley is vice chairman of the rate-setting Federal Open Market Committee.

The New York Fed also covers Puerto Rico, the U.S. Virgin Islands and parts of New Jersey and Connecticut.

Inflation remains below the 2 percent desired by Dudley and other Fed officials because the U.S. economy has been slow to bounce back from the 2007-09 recession. Dudley predicted high unemployment would still be around through next year.

"Even if we were to generate growth [nationwide] of 300,000 jobs per month, we would still likely have considerable slack in the labor market at the end of 2012," he said Monday at New York University's Stern School of Business.

In a 50-minute talk to students, alumni and reporters, Dudley was generally upbeat about the economy, particularly consumer spending and business activity.

"The situation looks considerably brighter today than six months ago" with the exception of hiring, he said.

Dudley acknowledged the recent surge in oil prices as civil unrest sweeps across North Africa and the Middle East, but cautioned against an impulsive reaction. Crude oil topped $100 a barrel Thursday on the New York Mercantile Exchange but has since subsided.

"Some of the recent commodity price pressures are likely to be temporary," Dudley said. "In particular, much of the most recent rise in food prices is due to the sharp drop in production caused by poor weather rather than a surge in consumption. More typical weather and higher prices should generate a rise in production that should push prices somewhat lower."

Regarding inflation, Dudley said, "It is well understood among all members of the [Federal Open Market Committee] that allowing inflation to gain a foothold is a losing game with large costs and few, if any, benefits."

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