WRAPUP 3-Fed’s Dudley warns of over-optimism, counters hawks

* Dudley: Must not be overly optimistic on growth outlook

* Dudley: Japan may dampen US growth somewhat in near-term

* Lacker, Plosser: Fed could raise rates this year
(Adds details on Reuters Fed poll and link in 17th paragraph)

By Kristina Cooke

SAN JUAN, Puerto Rico, April 1 (Reuters) – One of the
Federal Reserve’s most powerful policy makers pushed back
against an increasingly hawkish tone from other Fed officials
worried about inflation, saying he saw no need for the U.S.
central bank to reverse course.

William Dudley, president of the New York Federal Reserve
Bank, said on Friday the Fed was “still very far away” from
achieving its mandate of maximum sustainable employment and
price stability, even though the economy is on a firmer
footing.

His caution contrasted with comments from three other Fed
officials on Friday who focused on the risks that the U.S.
central bank’s policies could fuel inflation.

Earlier on Friday, upbeat jobs data underscored how the
U.S. labor market was on the mend. But Dudley’s comments
prompted prices for safe-haven U.S. Treasury bonds to erase
modest losses and drove the dollar down against the euro.
[US/][FRX/].

The March employment figures had initially driven
expectations that the Fed might end its easy monetary policy
sooner than expected.

“A stronger recovery with more rapid progress toward our
dual mandate objectives is what we have been seeking,” Dudley
told a conference in San Juan, Puerto Rico. “This is welcome
and not a reason to reverse course.”

The president of the New York Fed has a permanent voting
seat on the Fed’s policy-setting panel, unlike other regional
Fed officials who hold voting seats on a rotating basis.

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’s upcoming policy meeting on April 26-67 is its
last scheduled meeting before the bond-purchase program is
scheduled to end.

Dudley told reporters he would be surprised if the program
was not completed but said the benefits of further round of
so-called quantitative easing had “diminished a bit”.

The president of the Philadelphia Fed, Charles Plosser, and
Richmond Fed President Jeffrey Lacker, both considered
inflation hawks, said the Fed could raise interest rates in
2011, depending on how the economic recovery evolves.

“It wouldn’t surprise me if we needed to act before the end
of the year,” Lacker told CNBC television, adding that
inflation is a bigger risk to the economy this year than it was
in 2010.

Lacker said he had not yet made up his mind on whether he
thinks the Fed should stop short of the full $600 billion of
its bond-buying program.

Richard Fisher, the president of the Dallas Federal
Reserve, also took a hawkish tone in comments on Friday,
warning that rising inflation around the world might start to
push up wages in Europe and the United States.

However, Minneapolis Fed President Narayana Kocherlakota
said that a sufficiently tough central bank can control
inflation even if fiscal policy is so loose that it risks a
sovereign default.

Most leading economists do not expect the Fed to increase
interest rates this year, a Reuters poll found on Friday. For
details on poll see [ID:EBE7DA00I]

DIFFERENCES IN OUTLOOKS

The diverging comments highlight increasing differences
between Fed officials on the outlook for the U.S. economy and
inflation. Dudley sought to downplay the differences, saying
all Fed officials agreed on policy goals.

The head of the New York Fed, whose recent comments put him
on the dovish end of the Fed’s policy spectrum, is influential
vice chair of the Fed’s policy-setting committee, as well as
holding a permanent voting seat on the Fed’s policy-setting
panel.

Plosser, Lacker and Kocherlakota have a vote on policy this
year, while Fisher does not.

Acknowledging some hopeful signs in the economy, Dudley
said it was important not to be “overly optimistic” about
growth. He cautioned that progress could be slowed by the
effects of Japan’s devastating earthquake and tsunami and from
high oil prices, which have been pushed up recently by unrest
in the Middle East and North Africa.

Figures showing a second straight month of solid jobs gains
in March were “good news,” he said.

But the Fed would need to see sustained strong employment
growth to be sure that a “virtuous circle” — in which rising
demand generates more rapid income and employment growth and
leads to more consumer spending — was firmly established.

The U.S. government reported a gain of 216,000 jobs in
March and also reported a decline in the jobless rate to a
two-year low of 8.8 percent.

Dudley said he was “hopeful that jobs growth will increase
more rapidly in the coming months” but even if the economy adds
300,000 jobs per month, there would still likely be
considerable slack in the labor market at the end of 2012.
(Reporting by Kristina Cooke in San Juan, Edith Honan in
Harrisburg, Mark Felsenthal in Dallas and Corbett Daly and
Glenn Somerville in Washington; Editing by Leslie Adler)

WRAPUP 3-Fed’s Dudley warns of over-optimism, counters hawks