Federal Reserve Bank of New York President William Dudley said critics of the expansion of monetary stimulus are underestimating the central bank’s ability to raise interest rates when necessary.
“People do not understand clearly” that “we can have an enlarged balance sheet and not have a long-term inflation problem,” Dudley said in an interview with CNBC. “We are very confident of our ability to exit when the time comes.”
A group including former Republican government officials and economists urged Fed Chairman Ben S. Bernanke in a letter to stop his expansion of monetary easing, saying it risks an inflation surge. The missive will be published in today’s editions of the Wall Street Journal and New York Times, Jennifer Pollom, a spokeswoman for Economics 21, a Washington research group whose logo is on the letterhead, said yesterday.
Fed officials are trying to counter criticism at home and abroad that its policy threatens to boost inflation and weaken the dollar against the currencies of emerging nations that rely on trade for growth. Janet Yellen, the Fed’s new vice chairman, told the Wall Street Journal that the program, known as quantitative easing, shouldn’t be considered as “some sort of chapter in a currency war.”
The Fed can pay interest on excess reserves, “which allows us to raise the cost of credit in a way to moderate credit demand when the time comes,” Dudley said, according to a transcript of the CNBC interview.
“That tool we did not have prior to the fall of 2008,” he said. “So if you’re reading the old money and banking textbooks, yes, you would be very concerned that the increase in the size of the Fed’s balance sheet is going to ultimately lead to a long-term inflation problem.”
The U.S. central bank’s policy-setting Federal Open Market Committee on Nov. 3 embarked on a second round of unconventional stimulus, announcing it would buy $600 billion of Treasuries through June in an effort to increase inflation and bring down an unemployment rate hovering near a 26-year high.
Dudley defended the Fed’s decision against international criticism that the central bank would roil global economies by deflating the U.S. dollar. Officials in China, Germany and Brazil have complained about the Fed’s announcement, with German Finance Minister Wolfgang Schaeuble calling the move “clueless” and suggesting it was aimed at driving down the U.S. currency.
Dudley called Schaeuble’s criticism “off base.” A U.S. economy that’s “growing faster” and has “stronger employment growth” and “less risk of deflation” is “very much” in the best interest of the global economy, Dudley said. He said the Fed isn’t “trying to push the dollar to any particular level.”
Dudley, who serves as vice chairman of the FOMC, said the securities purchases will provide a “roughly equivalent” amount of stimulus as a 0.75 percentage point cut in the Fed’s benchmark interest rate. The target for the overnight bank lending rate has been near zero since December 2008.
“By easing financial market conditions,” the asset- purchasing program will make housing more “affordable,” lower business-investment costs and increase household wealth by supporting the stock market, Dudley said.
“It’s going to generate a little bit more employment growth,” Dudley said. “It’s not a fantasy. It’s not a magic wand. It’s going to make the economy grow a little bit faster.”
Employment in the U.S. last month increased for the first time in five months, as payrolls climbed 151,000 and the jobless rate held at 9.6 percent.
Dudley, 57, said that while “it’s heartening to see a little bit of signs of improvement,” the economy still needs “many, many months” of gains of 200,000 to 300,000 jobs.
“We have lots of slack in this economy,” Dudley said. “We’re not even generating sufficient jobs yet to actually bring the unemployment rate down.”