Dudley Says Fed Must ‘Forcefully’ Push Against Headwinds
Federal Reserve Bank of New York President William C. Dudley said policy makers must “forcefully” push against economic headwinds as the U.S. has yet to show “any meaningful pickup” in momentum.
“The economy still needs the support of a very accommodative monetary policy,” Dudley, who is vice chairman of the Federal Open Market Committee, said today in a speech in New York. “Improving economic fundamentals versus fiscal drag and somewhat tighter financial conditions are pulling the economy in opposite directions, roughly canceling each other.”
U.S. policy makers last week unexpectedly refrained from reducing their $85 billion in monthly bond buying, saying they need to see more signs of sustained labor-market gains. Chairman Ben S. Bernanke said on Sept. 18 the Fed will alter record accommodation based on “what’s needed for the economy” and not “let market expectations dictate our policy actions.”
Dudley said any decision to taper bond purchases shouldn’t be seen as a sign the benchmark interest rate will be raised any sooner, and that the Fed may wait “a long time” to raise the rate after breaching its 6.5 percent unemployment threshold. Dudley has consistently supported the Fed’s easing policies.
Dudley, 60, said the economy is “slowly healing” and faces headwinds including “the large amount of fiscal drag” from tax increases and budget cuts, as well as the “tightening of financial-market conditions” that has occurred since May.
Bernanke’s remarks earlier this year on the prospect for tapering sent bond yields as much as a percentage point higher. Yields on the benchmark 10-year Treasury note climbed as high as 2.99 percent on Sept. 5 from 1.93 percent on May 21, the day before Bernanke first outlined a possible timetable for a reduction in the asset purchases.
Treasuries rose today, pushing the yield on the 10-year note down two basis points, or 0.02 percentage point, to 2.71 percent at 1:29 p.m. in New York. The Standard & Poor’s 500 Index fell 0.5 percent to 1,701.91.
Dallas Fed President Richard Fisher said the central bank harmed its credibility with the decision not to taper bond purchases.
“Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question,” Fisher, who doesn’t vote on policy this year, said he told the Federal Open Market Committee. “I believe that is exactly what has occurred, though I take no pleasure in saying so,” he said today in remarks prepared for a speech in San Antonio, Texas.
Dudley said in response to an audience question that the market reaction to the possibility the Fed may reduce the pace of securities purchases demonstrated the policy’s effectiveness.
“The very idea that we might begin to taper” led “to a significant tightening of financial conditions,” Dudley said. That shows the stimulus has kept “financial conditions more accommodative than they otherwise might have been.”
Dudley reiterated that before supporting a trim to quantitative easing, he wants to see the extent of fiscal restraint and the impact of higher interest rates on housing.
Another regional Fed bank president, Atlanta’s Dennis Lockhart, today said monetary policy should focus on creating a more dynamic economy.
“Recently there appears to have been some slowing” in job creation, Lockhart, who next votes on policy in 2015, said in a speech in New York. Payroll gains have averaged just 148,000 a month the past three months, he said. Lockhart has also backed the Fed’s monthly bond purchases.
Dudley said he needs to see “evidence that the labor market has shown improvement,” and “information about the economy’s forward momentum that makes me confident that labor market improvement will continue in the future.”
“So far, I think we have made progress with respect to these metrics, but have not yet achieved success,” Dudley said. While “the economy continues to grow and payrolls are rising,” there “is little evidence of a pickup in the economy’s forward momentum.”
Joblessness (USURTOT) fell to 7.3 percent in August from 8.1 percent in August of last year, the latest reading before the Fed started its bond purchases the following month.
The decline in unemployment “overstates the degree of improvement,” he said. Other measures, such as hiring and job openings point to a “much more modest improvement.”
Dudley said in response to an audience question that “some of the decline” in joblessness is “not sustainable” because it’s due to a falling participation rate. As conditions “hopefully” improve, discouraged workers will reenter the labor force, he said.
The inflation rate will probably accelerate toward the central bank’s 2 percent target during the next few years, Dudley said, adding that inflation expectations remain “well-anchored.”
The Fed’s preferred measure of inflation, the personal consumption expenditures index, showed prices rising 1.4 percent in the 12 months ended in July. The Fed has a 2 percent inflation target.
The economy is “still stuck” growing close to the 2.2 percent rate “that has prevailed since the beginning of the expansion,” Dudley said. He predicted “a bit faster” growth next year if fiscal restraint lessens and financial conditions don’t tighten further.
St. Louis Fed President James Bullard, a voter on policy this year who has backed record stimulus, said on Sept. 20 the central bank may make a small trim to its asset purchases next month after its “very close call” at last week’s meeting.
“That was a borderline decision” after “weaker data came in,” Bullard said Sept. 20 in a Bloomberg Television interview. “The committee came down on the side of, ‘Let’s wait.’”
The New York Fed said last week it will begin testing an overnight fixed-rate reverse repurchase facility as an additional tool to aid policy makers when they eventually seek to raise interest rates and tighten policy.
“The goal of this new facility is to improve our control over overnight interest rates to aid us in the implementation of monetary policy,” Dudley said today.
To contact the editor responsible for this story: Christopher Wellisz at email@example.com