Dudley Signals More ‘Healing’ for Economy Needed Before Fed Pulls Stimulus
Faster-than-expected payroll growth last month shouldn’t alter the U.S. central bank’s plans to buy $600 billion in Treasuries through June to prop up the recovery, said William C. Dudley, president of the Federal Reserve Bank of New York.
“I don’t see any reason to pull back from that yet,” Dudley said to reporters after a speech yesterday in San Juan, Puerto Rico. Market expectations are for the Fed to complete its planned bond purchases in June and not to announce additional buying, he said. “I don’t view those expectations as unreasonable in any significant way.”
U.S. Treasuries reversed losses after Dudley’s remarks countered investor speculation the Fed is poised to withdraw stimulus. His comments countered suggestions by other policy makers, including Federal Reserve Bank of Philadelphia President Charles Plosser, that the central bank should consider raising interest rates this year.
Dudley is saying that “we’ve still got some pretty deep wounds here,” said Ethan Harris, head of developed markets at Bank of America Merrill Lynch Global Research in New York, in a Bloomberg Radio interview. Dudley’s message is, “Let’s not rush to the exits. Let’s wait as long as we can, get the healing well advanced and then we’re ready to do the exit,” Harris said.
Dudley spoke two hours after a Labor Department report yesterday showed the economy added 216,000 jobs in March, more than forecast, and the jobless rate unexpectedly declined to a two-year low of 8.8 percent. The rate was 5 percent in December 2007, when the 18-month recession began. Dudley said he wished the U.S. were making faster progress on reducing unemployment.
The yield on the 10-year Treasury note fell to 3.44 percent yesterday in New York trading, reversing a gain to as high as 3.52 percent. The yield was 3.47 percent on March 31. The Standard & Poor’s 500 Index rose 0.5 percent to 1,332.41.
Dudley’s caution is probably shared by Chairman Ben S. Bernanke, and some investors took other Fed officials’ comments in recent days as “representative of where the committee was,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
“The talk we’ve had over the past week has been dominated by the hawkish end of the spectrum,” said Feroli, a former Fed researcher. Dudley, who serves as the Federal Open Market Committee’s vice chairman, may have been trying “to sort of set the record straight,” Feroli said.
Dudley, 58, said during about 20 minutes of questions and answers with reporters that “the recovery looks to be better than six months ago but not as good as a month ago.” In his speech, he said that the recovery is “still tenuous” and that “we are still far from the mark with regard to the Fed’s dual mandate” for full employment and price stability.
“In particular, the unemployment rate is much too high,” said Dudley, a former Goldman Sachs Group Inc. economist who became the New York Fed’s chief in 2009.
His comments contrasted with those from other Fed officials this week.
Plosser, who dissented twice from decisions to lower borrowing costs in 2008, said in a speech yesterday in Harrisburg, Pennsylvania, that an increase in growth or inflation expectations may “suggest that it is time to begin taking our foot off the accelerator and start heading for the exit ramp.”
Federal Reserve Bank of Dallas President Richard W. Fisher, a five-time dissenter in favor of tighter policy in 2008, told reporters in Dallas yesterday that the central bank is moving closer to a period where reversing its easy-money policies “makes a lot more sense” as the unemployment rate falls.
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said in an interview March 31 with the Wall Street Journal that “it’s certainly possible” that the Fed’s near- zero benchmark interest rate would be raised by more than 0.5 percentage point this year if underlying inflation rises, the newspaper said in an article.
Plosser, Fisher and Kocherlakota hold rotating voting slots on the FOMC this year and supported the January and March decisions to affirm the plan for $600 billion in Treasury purchases. The FOMC next meets April 26-27 in Washington.
The presidents’ recent comments suggest that some of them may be more likely to vote against FOMC decisions later this year than cause a shift in policy, said Conrad DeQuadros, senior economist at RDQ Economics LLC in New York.
‘See a Dissent’
“It’s not very likely at the April meeting, but further down the road if some of these guys feel more strongly that the Fed should be taking some measures towards an exit from these extremely accommodative policies, then maybe you’ll see a dissent,” said DeQuadros, who founded the research firm with John Ryding, a fellow former Bear Stearns Cos. economist. “But I think that’s about it.”
DeQuadros said he expects the Fed to continue its policy of reinvesting payments on mortgage debt it holds into Treasuries after June, when the $600 billion of purchases are completed.
In addition, Dudley’s remarks indicate that Kocherlakota’s comments “probably aren’t consistent with the way Dudley was talking about the economy,” Feroli said.
The Fed in November embarked on its program of Treasury purchases to support prices and create jobs, and policy makers reaffirmed that goal in March. The strengthening economy has led some central bankers to argue that the stimulus isn’t needed.
Excessive Asset Prices
Kansas City Fed President Thomas Hoenig, who dissented from all eight FOMC decisions last year, including the start of QE2, said yesterday that the stimulus “was unnecessary” and could lead to excessive asset prices and inflation.
“My concern would be if there were any further easing into a recovery, is that you do accelerate imbalances that then cost you dearly later,” Hoenig, 64, who will retire Oct. 1, said in a Bloomberg Television interview in London.
Dudley, by comparison, reiterated his view that he would like to see “faster progress” toward achieving the central bank’s dual mandate. A “substantial pickup is sorely needed” in job growth, and “even if we were to generate growth of 300,000 jobs per month, we would still likely have considerable slack in the labor market at the end of 2012,” he said.
Harris, a former research official at the New York Fed, said that “you’ve got to be a little careful in listening to some of the regional presidents who frankly don’t have a very good track record in terms of signaling to the markets what the Fed’s likely to do next.”
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