By Michael S. Derby 

NEW YORK--Federal Reserve Bank of New York President William Dudley said Friday that it is unclear whether unsettled financial markets will knock the U.S. economy off course and change the outlook for U.S. central bank interest rate policy.

The official also said new evidence suggests that it might take even longer to get inflation back to levels desired by the central bank, in comments that also pushed back against those who are speculating that the Fed might have to provide new stimulus to the economy.

"The U.S. economy is in quite good shape" and it has "quite a bit of momentum" to carry it forward, Mr. Dudley told reporters at a gathering held at his bank on household-debt issues. But he added: "We are definitely aware" of what is happening right now in financial markets and overseas economies, and that will be taken into account when the Fed decides what it will be doing with its interest-rate policy decisions.

Mr. Dudley, who also serves as vice-chairman of the interest rate setting Federal Open Market Committee, declined to say whether volatility and big losses in asset markets had changed how central bankers are thinking about the future rate rises most expect are likely to happen this year.

"We are data dependent, so we are not going to be definitive and say we are absolutely not going to do X or do Y, because the data could change. And if the data were to change in a substantial way that could definitely affect our decision," he said.

Mr. Dudley's upbeat view on the economy's underlying strength came in the wake of two days of congressional testimony on the economy and policy outlook by Fed Chairwoman Janet Yellen. The central-bank leader affirmed that she continues to expect the economy to grow, allowing the Fed to raise rates gradually.

But her comments came amid more financial-sector woes that again raised the specter of a recession befalling the U.S. Markets continue to doubt the Fed will be able to deliver the number of rate raises officials have penciled in. The FOMC next meets in March, and few see a rise in rates happening then.

Mr. Dudley said he doesn't necessarily see what is happening in markets as being tied to the U.S. Events are "not really reflecting developments so much in the U.S. as developments abroad. There are questions about China's economic development prospects. There are questions about the degree of strain put on emerging market economies due to the weakness in commodities and energy prices," he said.

Mr. Dudley did note that there has been a "significant tightening" in financial conditions given the volatility, but even there, he said there were upsides for the U.S. such as a weaker dollar and lower long-term borrowing costs.

Mr. Dudley also said the roiling debate over whether the Fed might need to resort to a new round of stimulus by way of a negative rate policy is way overdone.

"I find that an extremely premature conversation to be having. The U.S. economy is in quite good shape," Mr. Dudley said. "There are a lot of things we would do" on the stimulus front before considering pushing short-term borrowing costs into subzero territory.

Mr. Dudley acknowledged that renewed declines in energy prices and a further easing in expectations of future inflation suggest getting inflation back to desired levels could take a bit longer. "I certainly still expect to meet the 2% objective over the longer term," Mr. Dudley said. "But at the margin" that process will likely take longer, he said.

Mr. Dudley said in his formal speech that the U.S. central bank might be limited in what it could do to deal with an unexpected economic downturn. "Monetary policy is appropriately still quite accommodative despite the advancing age of the expansion," he said. "While this limits to an extent the degree to which monetary policy can aggressively respond to any adverse events, the good news is that the economy is more resilient to any shocks."

"Key sectors of the U.S. economy, such as the household sector, seem to be in good shape," Mr. Dudley said. "The financial system is also clearly much stronger, with the banking system much better capitalized and with much larger liquidity buffers than in the years preceding the financial crisis."

The official repeated his view that expansions don't die simply of old age, but instead are often ended by central-bank response to rising inflation or unexpected shocks. "Since the possibility is low that a significant inflation risk would emerge over the near term, this means that the main danger facing the current expansion is the risk of large, adverse shocks," Mr. Dudley said.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

February 12, 2016 13:46 ET (18:46 GMT)