"All of a sudden, investors as a group realized that the risk is there, and they're adjusting price to reflect that," he said. "I think it's a healthy development."
Stronger economic growth, fueled in part by large tax cuts enacted at the end of last year, along with a bipartisan federal budget deal struck by Senate leaders this week that will boost spending, has led to fears that interest rates will rise more quickly than anticipated to head off inflation.
The Republican tax cut bill already was set to push the federal budget deficit close to $1 trillion in the 2018 fiscal year, which began Oct. 1, and the new two-year budget deal will propel it higher.
Increased federal borrowing drives up interest rates on bonds. The yield on the benchmark 10-year Treasury bond was up Thursday to 2.83 percent, near a four-year high.
William Dudley, president of the Federal Reserve Bank of New York, sought to downplay the recent market moves, calling them "small potatoes."
"The little decline that we've had in the equity market today has virtually no implications for the economic outlook," Dudley, who is vice chairman of the Fed's rate-setting committee, told Bloomberg TV.
He said the Fed's most recent forecast, in December, of three more small increases in the central bank's benchmark short-term interest rate "still seems like a very reasonable projection," he said.
His comments came after another member of the Fed's committee said Wednesday night that he also was still anticipating a gradual increase in interest rates.
"At this point, I don't see any of the movements in asset prices of late to fundamentally change my view of the economy," John Williams, president of the Federal Reserve Bank of San Francisco, told reporters after a speech in Hawaii.
"I think the economy is on a very solid growth path," he said. "In fact, I think some of the market reaction is to the fact that the economy is doing well."
Still, after a long streak of record-breaking stock market gains, pessimism is growing.
The percentage of individual investors expecting stock prices to drop is at a three-month high of 35 percent, according to weekly survey results released Thursday by the American Assn. of Individual Investors. The figure dropped 7.7 percent from the previous week and had been only 16 percent at the start of the year.
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