Fed to 'probably' hike this year, hit inflation target by 2016 -Dudley

By Howard Schneider and Richard Leong

NEW YORK (Reuters) - New York Federal Reserve Bank President William Dudley said on Monday the Fed remains on track for a likely rate hike this year and could reach its inflation target next year, faster than many other policymakers anticipate.

Dudley said the first hike could come as soon as October as policymakers take stock of an improving economy.

"If the economy continues on its trajectory ... it's a pretty strong case for liftoff," with the Oct. 27 to 28 session "live" for the rate hike debate, Dudley said at an event sponsored by the Wall Street Journal in New York. The Fed also meets Dec. 15 to 16.

The U.S. central bank delayed a hike at its September meeting amid uncertainty about the global economy, a U.S. market selloff and concern that inflation might fall further away from the Fed's two percent target.

But Dudley said he now feels inflation could reach that target sometime next year, a year or more sooner than the median forecast by Fed policymakers earlier this month.

Dudley said he was confident weak global economic conditions and the strong U.S. dollar would prove to be passing influences and allow the Fed to raise rates soon.

Interest rates futures implied traders remained doubtful of a year-end rate increase, assigning a 14 percent chance of a move in October and 37 percent in December, according to CME Group's FedWatch program.

While the Fed is mindful of China's slowdown and falling commodity prices hurting emerging economies, Dudley said the central bank's main focus is the United States.

"It's not about international development per se," he said.

He said the Fed would not deliberately "overshoot" the inflation target, but after the damage done by the 2007 to 2009 recession he also sees value in letting unemployment fall as low as possible even if that means a faster pace of price increases.

The latest reading of the Fed's preferred gauge suggests however that inflation remains well below 2 percent. The core metric on personal consumption expenditure that excludes volatile food and energy prices was up 1.3 percent in August from a year ago.

Still when the Fed is ready to hike, it has adequate tools at its disposal including fixed-rate reverse repurchase agreements, which Dudley said he considers "effective" to help set a floor on rates.

Referring to an incident last week in which Fed Chair Janet Yellen verbally stumbled as she tried to finish a speech, Dudley said her health is "fine."

(Reporting by Howard Schneider and Richard Leong; Editing by Chizu Nomiyama and Meredith Mazzilli)