Fed's Dudley warns of over-optimism, counters hawks

Dudley's tone contrasted with comments from three other Fed officials, who focused on inflation risks.

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.

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"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 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.