Dudley Says Fed Doing Everything in Its Power for Growth

Federal Reserve Bank of New York President William C. Dudley said the central bank will do all it can to spur growth after undertaking “extraordinary actions” to combat the credit crisis.

“The Fed is doing -- and will continue to do -- everything within its power to promote jobs and price stability,” Dudley, 58, said in a speech in Albany, New York. “We cannot be satisfied with the current state of the economy or the outlook for the next few years,” particularly with an “unacceptably high” unemployment rate of 9 percent, he said.

Fed officials are divided over whether the central bank should wait to see if the economy deteriorates before taking additional steps to lower borrowing costs and boost job creation. Fed Chairman Ben S. Bernanke said Nov. 2 that additional stimulus “remains on the table.”

The central bank still has “ammunition” for boosting the economy, such as providing clearer guidance on how long interest rates will stay low or resuming asset purchases, Dudley said yesterday at West Point, New York. It would be “desirable” for the Fed to offer more guidance on the economic conditions needed before it raises interest rates from close to zero, he said.

If the Fed opted to buy more bonds, “it might make sense” for much of those to consist of mortgage-backed securities to boost the housing market, Dudley said yesterday.

Dudley said in response to audience questions that the risk of the economy slipping into another recession has fallen “significantly” in recent months.

‘Still a Risk’

“There’s obviously still a risk but I think the risk has certainly diminished relative to what it was even a few months ago,” Dudley said. Additional stimulus “is certainly something that we haven’t ruled in or out depending on how the economy evolves in the future.”

Dudley said there “should be no anxiety” about whether the Fed’s enlarged balance sheet will cause the economy to overheat. The ability to pay interest on excess reserves “basically allows us to keep credit expansion under control,” he said. Market participants “accept this view,” as long-term inflation expectations are “very well-behaved,” he said.

The Standard & Poor’s 500 Index rose 0.4 percent to 1,220.55 at 9:56 a.m. New York time. The yield on the 10-year Treasury note increased four basis points to 2 percent. A basis point is 0.01 percentage point.

‘Significant Downside Risks’

Dudley said the U.S. economy continues to “face significant downside risks, mostly related to the stress in the eurozone.” He reiterated his view that European leaders are committed to resolving the sovereign debt crisis and said “they’re moving in the right direction toward greater fiscal integration.”

“Growth has picked up modestly in the second half of 2011, but not enough to bring unemployment down,” Dudley said. “While there are some bright spots in the U.S. economy and the financial system, strong headwinds are preventing a more vigorous recovery.” His comments on the national outlook were similar to those delivered yesterday.

While the local economy in Albany didn’t “fare as poorly” as the national economy, “we cannot confidently say that a solid recovery is under way” in the state capitol in part because of government job cuts, Dudley said. “These job reductions have disproportionately slowed Albany’s local economy” and “the key challenge for the Albany area will be to continue to prepare its residents for the best jobs being created here.”


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