Fed's Dudley: More than four interest rate hikes unlikely this year

  • The market is correct in its perception that the Fed will raise interest rates a total of three or four times this year, New York Fed President Bill Dudley said.
  • While the central bank is keeping its eye on inflation, more than four hikes would signal a Fed moving more aggressively than the market anticipates.
  • Traders currently are placing a 37 percent chance of a fourth increase before year's end.

The Federal Reserve remains on track to raise interest rates three or four times in 2018, but any more than that would be unlikely, New York Fed President William Dudley said Monday.

Market speculation has intensified over how aggressive the central bank will be this year on its path to normalizing monetary policy. Current expectations are for three increases, though traders are watching the trajectory of economic growth and inflation.

"Three or four seems like a reasonable expectation this year," Dudley told CNBC's Steve Liesman during a "Squawk on the Street" interview. "As long as inflation is relatively low, the Fed is going to be gradual. Now, if inflation were to go above 2 percent by an appreciable margin, then I think the gradual path might have to be altered."

During its March meeting, the Federal Open Market Committee approved a quarter-point rate hike in its benchmark funds rate, bringing the target range to 1.5 percent to 1.75 percent. Market participants expect the Fed to move again in June and in September, but are pricing in just a 37 percent chance of a fourth increase by the end of the year.

However, with signs showing that inflation is on the rise, there has been speculation that the Fed could get more aggressive.

William C. Dudley, President of the Federal Reserve Bank of New York
Ashlee Espinal | Reuters
William C. Dudley, President of the Federal Reserve Bank of New York

"The market understands that more than four is quite unlikely, because that would no longer be a gradual path of monetary policy tightening. It would also imply that the Fed was going to tighten by 50 basis points at a press conference meeting or go meeting to meeting," Dudley said. "So I think that the market sort of sees three as possible and four as possible, but five or six seems to be quite unlikely."

Dudley is in his last few months as chief of the pivotal New York operation. He will leave in mid-June and make way for John Williams, currently head of the San Francisco Fed.

While Fed critics have bemoaned the lack of diversity among central bank chiefs, Dudley called Williams "extremely well-qualified" for the position.

In other matters, Dudley said that current market valuations "don't look unreasonable" and that volatility, while high compared with 2017, is "back to a more normal regime."

And he said the U.S. has "legitimate issues" with China over trade, though he said a full-scale trade war would hurt.

"If trade barriers go up, it's bad for the U.S. economy. You're going to have more inflation, less growth, lower productivity, just bad, bad outcomes," Dudley said.