Fed’s Dudley Says Brexit Could Pose Risks If Turmoil Spreads

(Bloomberg) -- Britain's vote to leave the European Union could escalate into a significant headwind if it triggers wider financial market turmoil, said Federal Reserve Bank of New York President William Dudley, potentially clouding the horizon for U.S. interest-rate policy.

“It's still really early days to understand what kind of consequences that's going to have,” he said Tuesday at an event in Binghamton, New York, referring to fallout from the June 23 referendum to quit the EU.

“If it's confined just to the United Kingdom, it's pretty small,” he said. “But if there is broad contagion through financial markets, if it leads to greater questions about the stability of the European Union, then it could have more significant consequences.”

Global stocks have sagged, bond yields have declined to all-time lows and the dollar and gold have advanced as investors sought out havens in response to the unexpected U.K. decision to leave. Investors have also scaled back bets for a Fed rate increase this year and now only see a roughly under 10 percent chance of a hike by December. The Fed's next policy meeting is July 26-27.

Stocks Slide With Pound Amid Renewed Worries on Global Growth

Dudley said another fly in the ointment for policy makers was unexpectedly soft business investment, noting that this could be a “a wild card to the downside,” though the domestic economy has otherwise been doing OK.

“It looks like growth in the first half of the year is going to be a touch below 2 percent,” he said. “Nothing to write home about, but a 2 percent growth rate is sufficient to generate the kind of jobs gains that will keep gradually bringing the unemployment rate down.”

That said, inflation is still running below the Fed's 2 percent target, which taken together with the uncertainties facing the U.S. outlook “allows us to be patient in terms of letting the economy run,” he said.

To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net. To contact the editors responsible for this story: Carlos Torres at ctorres2@bloomberg.net, Alister Bull, Brendan Murray