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Dudley: Stock market drop not yet a 'central bank story'

Recent volatility is "not a big story for central bankers," Federal Reserve Bank of New York President William Dudley told a conference, although he added that if markets go down and stay down, it could affect his views on monetary policy.

Stock markets are still up sharply from a year ago and "having a bump like this has no consequence of the economic outlook," Dudley said at the New York event.

But if equities were to go down precipitously and stay down as it would affect the economic outlook and that "would affect my view of monetary policy," he said.

Markets had stabilized by Feb. 7, with major U.S. exchanges rising slightly at the open. The S&P 500, which on Feb 6 was down 4% over the prior three trading days, had closed 1.74% higher.

Markets have priced in at least three more rate hikes in 2018, with the first expected in March, but the upsurge in volatility following an extended calm has focused attention on whether the Federal Reserve will keep on that track.

The Chicago Board Options Exchange Volatility Index, or VIX, which reflects investors' expectations of how volatile markets will be over the next month, fell back to 29, after jumping up to 46 earlier in the day on Feb. 6.

Dudley also said that regulators needed to look into feedback loops that might add to market turmoil. He referred to reports that a financial product sold by Credit Suisse Group that allowed investors to short the VIX may have added to volatility as short positions had to be unwound.

"For some of these VIX products people will look at it with the benefit of hindsight and ask if they’re well designed," he said. "It wasn't that big a bump [in the markets] and these products actually blew up.