New York Federal Reserve Bank President William Dudley Monday said monetary policy is having an increasingly clear effect on the real economy, and that there's a chance that growth next year will be stronger than some economists think, but warned it's too early to conclude the U.S. economy has moved to a sustainably stronger path.

"It's too soon to take too much cheer from recent economic news," Dudley said in a question and answer session after a speech to the Economic Club of New York.

But he said the current recovery in the housing market is "very, very important", and that the Fed's ongoing policy of keeping interest rates very low appears to be helping.

"The impairment of monetary transmission channels is becoming less severe," he said.

As a result, there's a possibility that economic growth will pick up more vigorously than some people expect, he said.

"It's certainly possible that in 2014 or even earlier we could see economy picking up speed more rapidly than most people expect," Dudley said.

The greatest danger to the economic recovery is likely to occur in the next three to six months as cuts to federal government spending under the sequester mechanism exert a fiscal drag on the economy, Dudley said.

"The greatest danger in terms of economic forward momentum is probably in the next three to six months," he said.

Asked about external threats to the U.S. recovery, Dudley said the global economy is "weak" and that many other central banks are dealing with the same issues as the Fed is.

But he said the threat from Europe is "definitely" less than it was a year ago, and he praised the European Central Bank - which he said now has a "road map" for regulating the Euro area banking system.

Asked when the Fed will begin to unwind its massive holdings accumulated under its quantitative easing programs, Dudley said the central bank has already made it clear that won't happen before short-term interest rates start to rise.

"Interest rates will start to rise before we contemplate balance sheet sales," he said.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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