William C. Dudley, president of the Federal Reserve Bank of New York, said he doesn’t currently see the need for additional action to ease policy.
“My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front,” Dudley said in an interview with CNBC, according to its website.
The Fed has kept its benchmark rate near zero since December 2008 and bought $2.3 trillion of bonds in two rounds of asset purchases. The Federal Open Market Committee said last month it anticipated keeping its benchmark rate near zero until at least late 2014, reiterating a plan announced in January.
A Fed program to extend the average maturity of its portfolio holdings is scheduled to end in June, and that probably won’t have a “big effect” on markets, said Dudley, who is also vice chairman of the FOMC.
The New York Fed chief said he’s a “little bit more confident” the U.S. economy will keep growing and “a little bit less worried” the country will succumb to Japanese-style deflation. U.S. gross domestic product will probably expand at a “pretty disappointing” 2.4 percent rate, he said.
“I’d like to see growth quite a bit stronger than that,” Dudley said. “I’d like to see payroll gains in the 300,000 a month for a while.”
Employment Gains Stalling
If the economy were to slow, with employment gains stalling and inflation dropping, further monetary stimulus may be needed, Dudley said. The unemployment rate’s decline to 8.1 percent in April was partly due to a falling participation rate, he said.
“If downside risks from, say, Europe or the U.S. fiscal cliff were to really intensify, then I think you’d absolutely have to consider further monetary policy moves,” Dudley said. Additional stimulus is “about cost and benefits,” he said.
Further expanding the Fed’s balance sheet would increase its interest-rate risk and “could create anxiety among some people that this might actually sow the seeds for future inflation,” he said. “We have to take those expectations into consideration as a potential cost of monetary policy.”
The Fed’s second round of asset-purchases, which ran from November 2010 through June 2011, unleashed the worst political backlash against the U.S. central bank in three decades. Republicans from House Speaker John Boehner of Ohio to Representative Ron Paul of Texas warned that the measures risked a sharp acceleration in prices.
With respect to the sovereign debt crisis in Europe, regulators must ensure that the “U.S. banking system is in a situation where it has capital and liquidity resources” so that it “can handle significant shocks,” Dudley said. U.S. lenders “have a lot more capital than they had a few years ago,” and “very little exposure to peripheral Europe.”
European leaders clashed at a meeting yesterday over joint debt sales as they called on Greece to stick with the budget cuts needed to stay in the euro. The gathering was marked by new French President Francois Hollande’s challenge to the German-dominated deficit-cutting orthodoxy that has failed to stabilize the euro area and led to speculation that Greece might be forced out.
“If Europe were to evolve in a very bad direction, in terms of the integration of Europe, the confidence of the investor community in that integration story, then financial markets could get very unsettled,” Dudley said. “That would be another source of contagion back to the United States.”
The Standard & Poor’s 500 Index fell 0.1 percent to 1,316.76 at 9:58 a.m. in New York, while yields on 10-year U.S. Treasuries increased 3 basis points, or 0.03 percentage point, to 1.76 percent.
Asked about whether the New York Fed missed JPMorgan Chase & Co.’s $2 billion trading loss, Dudley said regulators’ role is to ensure banks have enough capital to withstand losses.
“It’s not to prevent the banks from making mistakes,” Dudley said. “Our job is to ensure that the banks can survive stress events and the financial system can continue unfettered offering credit to households and businesses.”