Fed's Dudley Says Further Easing Probably Warranted
Federal Reserve Bank of New York President William Dudley said the outlook for U.S. job growth and inflation is “unacceptable” and that the Fed will probably need to take action to spur the recovery and avert deflation.
“We have tools that can provide additional stimulus at costs that do not appear to be prohibitive,” Dudley, who serves as vice chairman of the Fed’s policy-setting Open Market Committee, said today in a speech to business journalists in New York. “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.”
Dudley’s remarks are one of the clearest signs that policy makers will start a second round of unconventional monetary easing as soon as the FOMC’s next meeting Nov. 2-3. While other Fed officials voiced a range of views in speeches this week, Chairman Ben S. Bernanke said yesterday that the central bank has a duty to aid the U.S. economy as the jobless rate holds near 10 percent.
Purchases of more assets by the Fed are “pretty close to a done deal,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, and a former Fed researcher. The central bank is making the case that “unemployment is high, inflation is low, we need to start moving the needle in the right direction and even if it doesn’t move it by a lot you just do it.”
Federal Reserve Bank of Chicago President Charles Evans also said today he favors further monetary accommodation as “we still have a long road ahead before we catch up to the level of activity we would have achieved in the absence of a crisis, or any other shock.” Evans doesn’t vote on the rate-setting FOMC this year.
Lowering long-term interest rates by restarting purchases of Treasuries or mortgage debt would have a “significant” effect on the economy by supporting the value of homes and stocks, making housing and refinancing mortgages more affordable and reducing the cost of capital for businesses, Dudley, 57, said to a Society of American Business Editors and Writers conference.
“Both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable,” Dudley said. “The longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.”
Fed ‘Not Happy’
Dudley’s speech “just drove home the point that the Fed is not happy with the current rate of economic growth and the below-targeted rate of price inflation,” said John Lonski, chief economist of Moody’s Capital Markets Group in New York.
Lonski said he expects the central bank to announce bond purchases at its November meeting.
Responding to questions afterward, Dudley said he’s not concerned the U.S. will relapse into recession and that he’s expecting the current 2 percent growth to “gradually accelerate.”
“What I’m less confident about is how fast we’re going to get back to our objectives” of price stability and full employment, he said.
The yield on 2-year Treasury notes fell to a record low as a report showed U.S. manufacturing growth slowed. The 10-year note yield was little changed at 2.52 percent at 11:20 a.m. in New York, according to BGCantor Market Data. The 2-year note yield was little changed at 0.42 percent after earlier touching the record low of 0.4066 percent.
Paul Gifford, chief investment officer at 1st Source Investment Advisors in South Bend, Indiana, said he’s been buying long-term bonds during the last two weeks because he’s convinced the Fed will continue to stimulate the economy.
“I do believe the Fed has every intent to keep rates low and the market believes them,” said Gifford, who manages $1 billion in fixed-income assets. “We continue to get weak economic data and if you see that continue then you’ll see more Fed actions.”
The risk that inflation expectations rise because of asset purchases can be countered by a “credible” plan from the Fed to exit the unprecedented stimulus with tools such as term deposit accounts, Dudley said. Also, “there is nothing to worry about” on expanding Fed exposure to higher short-term rates, he said.
Dudley said that $500 billion of purchases, for example, would add as much stimulus as reducing the Fed’s benchmark rate 0.5 percentage point to 0.75 percentage point, depending on how long investors expect the Fed to hold the assets.
Another option is for the Fed to announce an explicit inflation goal and then, if price increases are too slow, potentially aim to overshoot the goal in future years, he said. One risk is that investors may “mistakenly” conclude that the Fed was “tinkering with its long-run inflation objective,” undermining the change in policy.
Dudley’s comments differ from the FOMC’s Sept. 21 statement that it’s prepared to ease policy “if needed” to spur growth and achieve its mandate of stable prices and full employment.
The jobless rate has been above 9 percent since the worst recession since the Great Depression ended in June 2009. Inflation measures are “somewhat below” levels the FOMC judges consistent with its mandate, the Fed panel said in its statement last month.
Plosser and Lockhart
Dudley declined to comment on what he’ll advocate at the next meeting or to predict its outcome. Some policy makers may not be on board: Philadelphia Fed President Charles Plosser said Sept. 29 that he doesn’t see how additional asset purchases will help employment in the near term, while Dennis Lockhart of the Atlanta Fed said Sept. 28 that he hadn’t made up his mind yet on easing policy.
“We’ve fleshed out the camps over the course of the week,” Pierpont’s Stanley said. “My sense is focusing on anyone other than Bernanke at this point is probably getting you off the ball” and “you can view a lot of what Dudley’s saying almost as if he’s a proxy for Bernanke.”
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