UPDATE 1-Fed’s Dudley: shouldn’t tighten policy too soon

* Inflation concerns cast doubt on Fed’s easy policy

* Fed officials have said inflation pickup likely temporary

* Fed split over timing of withdrawal of easy policy

(Adds details, quotes)

By Stanley White

TOKYO, April 11 (Reuters) – The U.S. Federal Reserve
shouldn’t be too enthusiastic about tightening monetary policy
soon as there is still significant slack in the economy, a top
central bank official said on Monday.

Oil prices could push up headline inflation, but central
bankers shouldn’t over-react as this is likely to be temporary
and could lead to a monetary policy mistake, New York Federal
Reserve Bank President William Dudley said after giving a speech
in Tokyo.

U.S. economic activity has slowed in the past few months as
oil prices weigh on sentiment, Dudley said. Economic recovery
isn’t assured and wage growth remains low, he said.

“We shouldn’t be enthusiastic about tightening monetary
policy too soon,” Dudley said.

“If inflation expectations became unanchored, the Fed would
have to respond. I don’t see any signs that expectations are
becoming unanchored.”

The president of the New York Fed has a permanent voting
seat on the Fed’s policy-setting panel. His recent views have
been “dovish” on inflation, but other central bankers have
argued that the central bank needs to exit its ultra-easy
monetary policy.

The Fed has kept interest rates near zero since December
2008 and launched a $600 billion bond-purchase program in
November to further support the U.S. economic recovery.

At its last meeting, the Fed unanimously voted to stick to
the bond purchase program which is due to end in June.

The Fed next meets on April 26-27.

There is still significant slack in the U.S. economy as
unemployment is high and wage growth low, Dudley said. Headline
consumer prices in the United States could rise at a slower rate
than in other countries because prices are starting at a lower
base, he also said.

Minutes from the Fed’s last policy meeting showed that some
central bankers had started to think about hiking interest rates
before the end of this year, but views within the Fed are split
over how quickly to withdraw from its accommodative monetary
policy. [ID:nN05147451]

The latest reading on the Fed’s preferred inflation gauge
showed it was up 1.6 percent year on year, still below the 2
percent comfort zone held by many Fed officials.

Still, many Fed officials now fear inflation could start to
accelerate as rising commodity prices flow into the U.S. economy
through higher food and energy costs.

The U.S. economy is still not strong enough for the Fed to
start reversing its extremely accommodative monetary policy, Fed
Vice Chair Janet Yellen said on April 9. In contrast, Dallas Fed
President Richard Fisher said a day earlier the Fed needed to
stop “spiking the punch bowl.” [ID:nN09236621]

Both Yellen and Fisher vote on monetary policy.

With memories of the 2007-2008 financial crisis already
fading, some banks are calling for a return to “business as
usual,” a call that regulators should reject, Dudley said
earlier in prepared remarks.

“We have seen that ‘business as usual’ results in
unacceptable outcomes,” he said.

“As the crisis recedes in memory, the natural reflex will be
to relax and grow complacent.”

Global regulators are devising reams of rules designed to
push banks toward less risky business strategies and avoid
taxpayer bailouts by ensuring financial institutions have enough
reserves to withstand shocks.

While acknowledging that global regulators have made headway
in some areas, “We have much more to do to ensure that we have a
relatively level playing field,” Dudley said.

Banks deemed to be systemically important should be required
to hold common equity above and beyond the minimums for other
banks, Dudley said. Such a surcharge not only would act as a
buffer in the event of a shock, but would also keep them from
gaining a competitive funding advantage just by being bigger.

And regulators need to share information about systemically
important institutions, he said, and about trades in
over-the-counter derivatives, where risky bets contributed to
the recent crisis.

(Additional reporting by Ann Saphir; Editing by Chris
Gallagher)

UPDATE 1-Fed’s Dudley: shouldn’t tighten policy too soon