Federal Reserve Bank of New York President William C. Dudley said the economic recovery has been “disappointing” and that labor market progress has waned.
“After a brighter start to the year, economic momentum has slowed in the last few months,” Dudley said in the text of remarks delivered to the Puerto Rico Chamber of Commerce from New York. “Employment growth remains positive, but has slowed considerably of late as the economy has lost forward momentum, and the unemployment rate remains elevated.”
The policy-making Federal Open Market Committee added to its record monetary stimulus on June 20, expanding the Fed’s maturity-extension program known as Operation Twist through the end of the year. Central bank officials also downgraded their forecasts for growth and employment while noting “significant downside risks” to the economy.
Dudley, vice chairman of the FOMC, said the “headwinds retarding recovery” include consumer deleveraging, a lack of credit availability, fiscal tightening and the sovereign debt crisis in Europe. He said there is “elevated uncertainty” about the economic outlook, which poses “challenges” in determining how much to adjust his forecast.
“Although I have made some adjustments of late, they have been relatively modest to date” because “more information is needed” about issues including Europe’s crisis, Dudley said. “I can imagine material data on a number of dimensions could become available in the coming weeks and months that could lead me to adjust my forecast further.”
Policy makers last week cut their expectations for growth in 2012 to a range of 1.9 percent to 2.4 percent, down from an April prediction of 2.4 percent to 2.9 percent.
“I will be paying particularly close attention to whether domestic momentum and hiring picks up now that the pay-back for the mild winter is over, and whether financial conditions, which are heavily influenced at present by developments in Europe, ease or tighten further,” Dudley said.
The economy added 69,000 jobs in May, the slowest pace in a year, while the unemployment rate climbed to 8.2 percent from 8.1 percent in April. Fed officials predict unemployment of 8 percent to 8.2 percent at year-end, compared with an April projection of 7.8 percent to 8 percent. They expect joblessness of 7.5 percent to 8 percent in 2013, up from 7.3 percent to 7.7 percent.
Dudley flagged that the FOMC used new language in its statement last week, saying that policy makers are “prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
“I will let those words speak for themselves,” Dudley said. Fed Chairman Ben S. Bernanke said at a Washington press conference after the FOMC announcement that policy makers are focusing “primarily” on the outlook for jobs in deciding whether to ease further.
The New York Fed chief said he expects inflation to be “slightly below” the central bank’s 2 percent target “over the next few years” as the economy “continues to operate with significant slack” and inflation expectations are “well-anchored.”
“With gasoline prices now falling sharply and upward pressures from apparel prices now appearing likely to dissipate, I expect that inflation will decline a bit in coming months, falling somewhat further below our 2 percent objective,” Dudley said.
Dudley said that “a solid recovery has yet to take hold” in Puerto Rico, where “conditions remain challenging.” Puerto Rico’s job market is a “trouble spot” with an “unacceptably high” unemployment rate of 14.8 percent, he said. Labor force participation has also been declining, he said.