Fed's Dudley says higher rates soon 'quite possible'

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The Federal Reserve's policy committee may need to begin raising interest rates for the first time since 2006, though some slack remains in the labor market, Federal Reserve Bank of New York President William C. Dudley said Thursday.

"It is quite possible that the conditions the Committee has established to begin to normalize monetary policy could soon be satisfied," Dudley said in a speech in New York. "I will be evaluating the incoming information to see if it confirms my expectation that growth will be sufficient to further tighten the U.S. labor market."

Fed President James Bullard of St. Louis earlier on Thursday urged the Fed to raise interest rates from near zero, while Chicago Fed leader Charles Evans stressed any increases should be "gradual" and rates could be less than 1 percent at the end of next year.

Fed Chair Janet Yellen has told Congress the U.S. economy was performing well and a December rate hike is a "live possibility."

"The economy looks to be in decent shape and is likely to continue to grow at a slightly above-trend pace," Dudley told the Economic Club of New York.

"Spare labor resources are shrinking. But there still is some risk that the growth pace could slow as the trade sector acts as a drag on aggregate economic activity."

While noting that the job market has made progress, Dudley said he wasn't ready to commit to December, adding that "we have still not seen compelling evidence" that a tighter market is leading to greater compensation gains.

A still-elevated number of part-time workers and discouraged workers suggests the economy is not at full employment, with slack of an additional quarter point to half point in an unemployment rate at 5 percent, Dudley said.

"I have greater concerns because we continue to fall substantially short of our inflation objective of 2 percent," and measures of inflation expectations "are under downward pressure."

Investors raised the probabilities of a Fed rate hike in December after a Labor Department report Friday showed 271,000 jobs were added in October, and the jobless rate fell to 5 percent.

The Fed faces risks of hiking rates too quickly or too slowly, with those concerns "nearly balanced," Dudley said.

Beyond the first rate increase, the economy will face headwinds including a strong U.S. dollar and tight mortgage credit, he said.

"After lift-off the upward trajectory of the short-term rates is likely to be quite shallow," Dudley said.