Fed’s Dudley Says Jobs Report Damps Upbeat Economic Data

Federal Reserve Bank of New York President William C. Dudley said the economy may be gaining strength even as the weakest job growth in five months highlights risks to growth.

“The incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established,” Dudley said, speaking to business leaders at the Syracuse Technology Garden in Syracuse, New York and repeated in an identical speech at Syracuse University later this morning. Yet “it is still too soon to conclude that we are out of the woods, as underlined by the March labor-market release,” he said, adding he still supports holding the Fed’s main interest rate close to zero through late 2014.

The Federal Open Market Committee plans to meet April 24-25 to debate policy for an economy described as growing at a “modest to moderate” pace in the Fed’s Beige Book survey released yesterday. Fed officials, mandated by Congress to achieve maximum employment, confront an 8.2 percent jobless rate that Dudley, FOMC vice chairman, said is “unacceptably high.”

Dudley said in response to an audience question that he agrees with the Fed’s March 13 statement backing low rates through at least late 2014. “I haven’t seen any set of information that would suggest to me we should change that view,” he said.

QE ‘Not Free’

He said it’s “not free to do another round of quantitative easing,” noting that bond purchases would expand the Fed’s balance sheet and “create more anxiety on the part of some that it would lead to future inflation.”

While asset purchases by the Fed shouldn’t be considered inflationary, some people may hold such a view, he said.

In a separate question and answer session at Syracuse University, Dudley said the Fed might “reconsider” additional stimulus measures if the economy got worse.

He described the conditions that would prompt this: “If we get back into a situation where the U.S. economy is faltering and we’re not having the kind of economic growth putting the unemployment rate on a clearly downward trajectory. If inflation is well behaved or if inflation expectations are starting to falter.”

Employers added 120,000 workers to payrolls last month, the least since October and below every forecast in a Bloomberg survey of 80 economists. Estimates ranged from gains of 175,000 to 250,000 jobs.

Mild Weather

The employment report may indicate that mild weather early in 2012 spurred hiring in January and February, muting job creation in March, Dudley said.

“We thus will need to see more data to determine the extent to which the March data represent a transitory weather- related setback,” he said.

Vice Chairman Janet Yellen endorsed the central bank’s “highly accommodative” policy yesterday, saying the Fed probably won’t meet its goal of full employment for years while inflation remains in check.

“Over the next several years, I anticipate that we will fall far short in achieving our maximum employment objective, and I expect inflation to remain at or below” the Fed’s 2 percent target, Yellen said in a speech in New York. She said housing and the European debt crisis are among “significant headwinds” that may restrain growth.

While further easing “could be warranted if the recovery proceeds at a slower-than-expected pace,” Yellen said “a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates.”

Permanent Vote

As president of the New York Fed since January 2009, Dudley, 59, holds a permanent vote on the central bank’s monetary policy committee.

He spoke today as part of a two-day tour of upstate New York. Following his speeches in Syracuse, he will visit Welch Allyn, a manufacturer of medical devices in Skaneateles Falls, New York. Tomorrow, Dudley will speak in Buffalo, New York.

The central bank compiles an anecdotal account of economic conditions across the country known as the Beige Book. The report, released yesterday, said that “hiring was steady or showed a modest increase across many districts.”

Stocks Rise

U.S. stocks rose, sending the Standard & Poor’s 500 Index higher for a second day, amid policymakers’ indications that interest rates will remain low. The S&P 500 added 1 percent to 1,382.83 at 12:19 p.m. New York time. The benchmark gauge yesterday snapped the longest losing streak since November.

Dudley said the expansion “has yet to be strong enough on a sustained basis to make a big dent in the overall amount of slack in the U.S. economy.”

It faces headwinds and downside risks, including rising gas prices, weaknesses in housing and government cutbacks at the federal, state and local levels, Dudley said. Economic growth outside the U.S. may also flag, and disruptions to the supply of oil could push up prices, he said.

Policy makers in Europe have “not resolved, but subdued” the “adverse feedback loops” that existed between their banks and the fiscal problems of their governments, Dudley said.

In response to audience questions, Dudley said U.S. deficits would be even worse when interest rates begin to rise.

Rise ‘Significantly’

“Once we normalize interest rates the debt service cost to the U.S. will go up significantly,” Dudley said. “We’re not going to keep interest rates low to solve fiscal problems.”

Dudley said the Fed will “do what it has to do” on interest rates to achieve its dual mandate for full employment and stable prices and “if this causes more fiscal issues, too bad.”

Dudley cited a slowing of inflation measured by the annual change in the personal consumption expenditures index. The gauge slowed to a 2.3 percent gain in February from 2.9 percent in September, above the Fed’s goal of 2 percent inflation.

“Even though the recent rise of gasoline prices mentioned above could interrupt this pattern, we expect this moderation of overall inflation to resume later this year,” Dudley said.

To contact the reporter on this story: Joshua Zumbrun in Syracuse, New York at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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