Fed's Dudley warns against rate hike

By Ovunc Kutlu

NEW YORK (AA) -- The Federal Reserve should be careful in raising its benchmark interest rate, William C. Dudley, President and CEO of New York Fed warned in a speech Monday.

"A risk management approach to monetary policy would suggest that the more concerned one is with the effectiveness of these policies at the zero lower bound, the more cautious one would be in the process of removing accommodation," said Dudley, who has a voting right in the the Federal Open Market Committee (FOMC) this year.

In his speech at the 40th Annual Central Banking Seminar in New York, Dudley said the FOMC "responded aggressively" toward the weakening American economy starting in 2007.

"It began cutting the policy rate from 5.25 percent in September 2007 and reached the effective zero lower bound in December 2008. From that point on, the FOMC turned to unconventional monetary policy in order to provide additional stimulus to the economy," he said.

Dudley, however, stressed that the FOMC would not be unable to respond to another recession in the economy with "a [rate] cut of such magnitude" since the federal funds rate is still currently close to zero.

The Fed increased the federal funds rate from 0.25-0.50 percent last December.

Although analysts expected more increases this year, the FOMC left rates unchanged in six meetings this year.

The market and analysts still expect the Fed to make at least one rate hike in 2016, most possibly in December, depending on incoming data that would suggest strengthening in the general outlook of the U.S. economy.