Dudley: Fed likely should raise rates before end of 2015

Despite an "uncertain" economic outlook, the Federal Reserve likely should raise interest rates before the end of the year, the president of the Federal Reserve Bank of New York said Friday in Minneapolis.

"I would expect, in the absence of some dark cloud gathering over the growth outlook, to support a decision to begin normalizing monetary policy later this year," William Dudley said in a speech to the Economic Club of Minnesota.

On the same day that the Department of Labor reported the U.S. economy added 280,000 jobs in May, Dudley cautiously forecast that growth in the U.S. should pick up over the course of the year.

Oil and gas investment is showing signs of stabilizing, the outlook for other types of business investment is strong, and there is "plenty of room for further gains in residential investment." Household finances are in good shape, with historically low debt levels, which is a good sign for the future of consumer spending.

"But I can't be completely confident about this forecast," he said. "Several times during this expansion we have been fooled by sharp rises in the growth rate that appeared to presage a sustained pickup."

Several pieces of evidence indicate the nation's low unemployment rate overstates the health of the job market.

"You see a lot of people that are working part-time for economic reasons," he said. "You've seen the participation rate coming down sharply in recent years."

Asked by University of Minnesota economist V.V. Chari what he sees as the risks of continuing the Fed's policy of extremely low interest rates, Dudley said inaction could force the Fed into a "stop-start" monetary policy.

If the Fed's policy-setting Open Market Committee, or FOMC, doesn't raise rates soon, the economy could start producing higher wage growth and higher inflation, which would force it to intervene by sharply raising rates and that, in turn, could push the economy back into recession.

Very low interest rates can also cause distortions in financial markets that threaten stability, Dudley said, though instability is not apparent now.

Asked what he thought of the International Monetary Fund's recent call for the Fed to hold off on raising interest rates until 2016, Dudley brushed it off.

"There's a lot of views on what the Fed should do, in fact there's a lot of views around the FOMC table about what the Fed should do," he said. "I'm certainly not troubled by another opinion."

Dudley, who said he planned to watch the Twins host the Milwaukee Brewers on Friday night at Target Field, spent the morning at the Minneapolis Fed, meeting economists and business leaders.

He spoke at the Economic Club's last meeting of the year before a summer break.