Feb. 14 (Bloomberg) -- Federal Reserve Bank of New York President William Dudley said the central bank’s purchases of bonds have made the outlook for the economy “considerably brighter,” with growth likely to quicken this year and next.
“Several notable forces combined to encourage the resumption of stronger growth,” including plans to purchase $600 billion in bonds through June and “the lagged effects of its previous measures,” Dudley said today in a New York speech. Banks also “did begin to ease standards somewhat in the second half of 2010,” he said.
Dudley, who said the central bank’s plan to buy $600 billion of bonds through June has “helped to ease financial conditions,” is among Fed officials defending the central bank’s decision last month to press ahead with its second round of asset purchases in an effort to create jobs.
The so-called quantitative easing program, dubbed “QE2” by analysts and investors, sparked the harshest political backlash in three decades. Republican Representative Paul Ryan of Wisconsin, chairman of the House Budget Committee, last week repeated his criticism of the purchases, saying they risk creating asset-price bubbles and fueling inflation.
Quantitative easing was expected to work by improving financial market conditions, not by creating more bank reserves, Dudley said in response to audience questions. “Financial conditions are much more accommodative than they were six months ago,” Dudley said. The bond purchases seem to have been more “helpful” than “harmful,” he said.
‘Not Yet Well’
Dudley said that, while the economy is “healthier,” it’s “not yet well” and needs to “grow at a considerably faster rate than we have seen so far in this recovery” to bring down the jobless rate.
“The economy is now cycling up in a pretty significant way,” Dudley said in response to questions. “It’s important for the economy to get a little more forward momentum” to have businesses gain confidence about the economic outlook and increase hiring, he said.
Fed Chairman Ben S. Bernanke said in testimony before the House budget panel last week that the unemployment rate is likely to remain high “for some time” even after its biggest two-month drop since 1958, to 9 percent in January. Joblessness rose above 9 percent in May 2009, beginning the longest period of unemployment at that level or higher since monthly records began in 1948.
Conditions ‘In Place’
“I am happy to say that we believe the conditions are in place for such higher growth in 2011 and 2012,” Dudley said. Spending by businesses and consumers has increased, reflecting increased optimism about the economy, and the extension of the Bush-era tax cuts will also help support growth, he said.
“While the soft patch is over and the risk of a double dip has subsided, the economy still faces headwinds as a result of the aftermath of the financial crisis, the housing bust and the high level of unemployment that still prevails,” Dudley said. Banks may also keep credit conditions “tighter than normal” as they try to improve their balance sheets and avoid credit losses, he said.
“In short, viewed through the lens of the Federal Reserve’s dual mandate -- the pursuit of the highest level of employment consistent with price stability -- the current situation remains unsatisfactory. However, we appear now to be moving in the right direction,” he said.
By contrast to the national picture, the regional economy “appears to have paused” in the fourth quarter, which was “disappointing,” Dudley said. “Both nationally and regionally, unemployment remains stubbornly high, but many indicators suggest that conditions are in place for stronger growth in the coming months.”
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