Financial markets are likely to undergo “some turbulence” when the Federal Reserve moves to raise interest rates, Federal Reserve Bank of New York President William Dudley said Friday.
“After all, lift-off will represent a regime change after more than six years” of the Fed targeting short-term interest rates near zero, Dudley said in a speech delivered in Minneapolis.
Dudley’s remarks acknowledged a fear, expressed by some monetary policy experts, that the central bank inevitably risks provoking a market reaction when it announces its intention to raise rates.
Some have suggested that it could prove to be a replay of the summer of 2013, when then-Chairman Ben Bernanke’s remarks about the Fed slowing the pace of its bond purchases caused rapid increases in interest rates on Treasury securities and mortgages and market volatility. The episode came to be known as the “taper tantrum.”
Dudley said Friday that it would be the Fed’s responsibility to clearly spell out its plans for raising rates to avoid a worse market reaction, which itself could upset the Fed’s plans for tightening monetary policy if it were severe enough.
In its most recent monetary policy statements, the Fed has indicated that it will raise its rate target after further labor market improvement and when inflation heads up back toward the central bank’s 2 percent target.
Chairwoman Janet Yellen has suggested that those conditions are likely to be met this year. In the wake of disappointing data in the early part of the year, however, investors and some members of the central bank have questioned whether that will be the case.
Dudley, who as president of the New York regional bank is a permanent voting member of the Fed’s monetary policy committee, said Friday that he thought that a rate increase is still likely this year. He cautioned, though, that the labor market could disappoint later in the year.
After an initial hike, he added, the increase in interest rates is likely to be “relatively shallow.”
In recent days, Fed officials have sought to manage expectations about monetary stimulus by focusing less on the date of the first increase and more on the subsequent pace of rate hikes, which one official has said will be only a “crawl.”
