Premature to discard possibility of rate incerase in 2016, Fed´s Dudley says

It would be premature to rule out an interest rate hike in 2016, a top US rate-setter said.

In remarks prepared for a speech to be delivered in Bali, Indonesia, New York Fed president William Dudley said markets might not be assigning sufficient weight to the possibility that economic growth might outperform policy-makers´ expectations.

Indeed, financial conditions might ease or the risks from Brexit and international developments fade away, he said.

"If such events were to occur, this might necessitate a faster pace of adjustment. For these reasons, I think it is premature to rule out further monetary policy tightening this year," he added.

Likewise, Dudley said financial markets were being too complacent in pricing in just one interest rate hike by the end of 2017.

Nevertheless, the central banker was of the opinion that the medium-term risks facing the US economy were "somewhat skewed to the downside".

In his speech, Dudley described how events abroad - such as Brexit - could impact the US economy through various channels, including international trade, global interest rates and currencies, bank equity prices or via political uncertainty.

Despite that, he also took aim at a common-place critique from some corners that the Federal Reserve was erring by taking events abroad too much into account when setting monetary policy in the US.

"Some have expressed an alternative view that the movement in these [interest] rate projections is an indication that the FOMC’s reaction function is unstable and unmoored. I do not see it that way at all.

"The Federal Reserve has a clear domestic-oriented mandate that was set by the U.S. Congress. Instead, I believe that setting U.S. monetary policy to best achieve our domestic mandate will help to support sustainable growth and development abroad."

As of 09:46 BST the yield on the benchmark 10-year US Treasury note was lower by three basis points to 1.48%.