After the report, traders of short-term rate futures boosted bets the Fed will raise rates this year, and the yield on the two-year U.S. Treasury rose.
Dudley, a permanent voting member on the Fed's monetary policy committee and a close ally of outgoing Fed Chair Janet Yellen, said record-breaking financial markets appear unconcerned that "the current fiscal path is unsustainable". "While the fact that inflation is below the [Federal Open Market Committee's] 2% objective argues for patience, I think that is more than offset by an outlook of above-trend growth, driven by accommodative monetary policy and financial conditions, as well as an increasingly expansionary fiscal policy", Mr. Dudley said.
The Fed is expected to pay about 80.2 billion U.S. dollars to the Treasury in 2017, down from the 91.5 billion dollars in 2016, and falling for a second year in a row, according to preliminary estimates by the Fed.
After covering its own expenses, the US Federal Reserve transfers each year to the Ministry of Finance its remaining funds, which are used to reduce the budget deficit.
The tax cuts, he said, "will come at a cost".
He noted that corporations and higher-income Americans are less inclined to spend, suggesting "a significant portion of the tax cuts will be saved not spent". "The legislation will increase the nation's longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby-boom generation retires".
The recent drop in U.S. unemployment could spark a surge in inflation that, given the Federal Reserve's current policy framework, could trigger interest-rate hikes that bring on a recession, Boston Federal Reserve President Eric Rosengren warned on Friday.
The bank reported that the higher interest rates paid to banks for their reserves are the main reason for reducing payments to the government.