Fed's Dudley sees mid-2015 rate rise, continued US rebound

By Jonathan Spicer

TROY N.Y. (Reuters) - The Federal Reserve could reasonably be expected to raise U.S. interest rates in mid-2015, an influential Fed policymaker said on Tuesday in a speech that cautiously predicted a rebound in U.S. economic growth and inflation.

William Dudley, president of the New York Fed, pointed to the stronger U.S. dollar as a key reason why growth and inflation are unlikely to substantially overshoot his forecasts.

He predicted about 3 percent growth in both the second half of this year and in 2015, and a slow rise in inflation to about 1.9 percent by the end of next year. Both are toward the optimistic end of the array of Fed policymakers' forecasts.

"The consensus view is that (rates) lift-off will take place around the middle of next year. That seems like a reasonable view to me," Dudley told students and professors at Rensselaer Polytechnic Institute.

A policy tightening then, he said, would be "very good news" even if it caused a "bump or two in financial markets."

Economists expect the central bank to raise rates toward the middle of next year. U.S. growth disappointed in the first half of the year, while inflation has remained below a Fed goal. Unemployment meanwhile has fallen steadily.

Dudley, who has a permanent vote on monetary policy and stands among the core of the Fed's dovish decision-makers, gave a balanced but generally optimistic view of the world's largest economy. For the second time in a month, he pointed to the strengthening currency as a factor in determining monetary policy.

"The appreciation of the dollar and weakening of foreign growth prospects that I mentioned earlier both act to dampen inflation pressures," he said.

While unemployment has fallen to 5.9 percent, a measure of Americans participating in the labor force has steadily declined. In a slight change, Dudley said he was now less confident that labor participation would rebound, due in part to demographic factors like the retirement of baby boomers.

On the timing of the rate rise, Dudley echoed Fed Chair Janet Yellen, saying, "firmer growth, higher inflation, and a more rapid tightening of the labor market could cause us to move earlier. Conversely," he said, "should economic growth disappoint, the timing of lift-off could be pushed later."

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)