Federal Reserve Bank of New York President William Dudley said the central bank needs to take action to bring down the unemployment rate even though expanding its balance sheet isn’t a “perfect” tool.
“To the extent that we can do things to improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so,” Dudley said today in response to audience questions after a speech in Ithaca, New York. Policy makers haven’t yet decided whether to buy additional assets to spur economic growth, he said.
“I don’t think anyone at the Federal Reserve thinks” expanding the balance sheet is a “panacea to our nation’s ills,” said Dudley, 57, who is also vice chairman of the policy-setting Federal Open Market Committee. “We have a very clear mandate. They don’t say anything about ‘Don’t use a tool unless the tool is perfect.’”
The Fed, having reduced interest rates almost to zero and bought $1.7 trillion in securities, is considering a new round of asset purchases as the economy shows signs of flagging, according to the minutes of the FOMC’s Sept. 21 meeting. Policy makers are also weighing efforts to boost public expectations that inflation will rise, the minutes said.
It is “important to communicate clearly” the Fed’s strategy because “the better we can help market participants think along with us” the “more accurate” the implementation of monetary policy will be, Dudley said to reporters after the speech.
The market is pricing in a “high likelihood” of a second round of quantitative easing, or additional bond purchases, at the FOMC’s Nov. 2-3 meeting, Dudley said. Still, the FOMC will “put very little weight on what’s priced in or not priced in” when it meets and will consider the costs and benefits of action, he said.
The dollar fell to a 15-year low versus the yen today on bets that the Fed will debase the greenback through an announcement of additional bond purchases. The U.S. currency dropped as much as 1.2 percent to 80.41 yen, the weakest level since April 1995, before trading at 80.82 at 5 p.m. in New York, compared with 81.38 on Oct. 22.
The dollar “is not the goal” of monetary policy and is the “province” of the U.S. Treasury, Dudley said.
“If we do what we need to do in terms of achieving our dual mandate, the dollar will take care of itself,” Dudley said, referring to the central bank’s goals of full employment and price stability. “I don’t spend a lot of time focusing on the dollar.”
Near 10 Percent
Dudley repeated his view that the Fed will probably need to stage a second round of stimulus to combat too-low inflation and a jobless rate that’s stuck near 10 percent.
“In a recent speech, I said that 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 in his speech.
“I said that I thought further Fed action was likely to be warranted unless the economic outlook were to evolve in a way that made me more confident,” he said.
Dudley said on Oct. 1 that more unconventional stimulus is “likely to be warranted” because inflation is too low and unemployment too high, fueling speculation the FOMC will act at its meeting on Nov. 2-3. He also reiterated this view on Oct. 19.
Purchases totaling about $500 billion would add as much stimulus as reducing the Fed’s benchmark rate by 0.5 percentage point to 0.75 percentage point, depending how long investors expect the central bank to hold the assets, Dudley said in the Oct. 1 speech. The U.S. economy is slowly recovering from the worst recession since the Great Depression as housing and consumer spending falter, he said.
“We do have a recovery,” Dudley said. “The bad news is, though, it’s pretty tepid and it looks like the momentum of the economy is slowing.”