Fed’s Dudley Says Easing Vital to Spur Too-Slow Growth

Federal Reserve Bank of New York President William C. Dudley said the central bank’s new stimulus is vital for boosting “unacceptably slow” improvement in economic growth.

“In the absence of further monetary easing, I concluded that growth would remain too subdued over the next several years to make big inroads into the spare capacity that remains from the Great Recession,” Dudley said today in a speech in Florham Park, New Jersey. “As a result, unemployment would remain unacceptably high, with economic risks skewed to the downside.”

After 43 straight months of unemployment above 8 percent, the Federal Open Market Committee announced on Sept. 13 its third round of large-scale asset purchases since 2008. The FOMC for the first time didn’t set a limit on the amount the Fed will buy or the duration of purchases. Chairman Ben S. Bernanke said that day at a press conference he’ll add to the record stimulus until achieving “sustained improvement” in the labor market.

“Linking our purchases more closely to economic outcomes underlines our determination to generate the kind of recovery that will deliver more rapid progress towards maximum employment in the context of price stability,” Dudley, who is also vice chairman of the FOMC, said before the Morris County Chamber of Commerce.

Dudley said he will weigh whether it’s “appropriate” to continue buying longer-term Treasuries at the end of the year when the Fed’s program to swap short-term debt with longer-maturity securities expires.

Big Improvement

“This will depend on whether we have seen a substantial improvement in the labor market outlook in the interim and any further evidence about the costs and benefits of continuing such purchases,” Dudley said.

Dudley said in response to audience questions after his speech that the Fed’s policies are “pushing hard” to boost economic growth, which will ultimately allow the central bank to normalize interest rates. The Fed’s policies aren’t intended to encourage too much borrowing and policy makers are monitoring whether low interest rates are fueling excesses, he said.

Treasuries rose for a second day amid speculation economic growth will fail to fuel job creation, and most U.S. stocks retreated. Ten-year U.S. Treasury yields declined three basis points today to 1.81 percent while the Standard & Poor’s 500 Index declined 0.1 percent to 1,459.32 at 4 p.m. in New York.

Near-Zero Rates

While announcing it would buy $40 billion of mortgage debt a month, the Fed last week extended the prospect of near-zero interest rates until mid-2015. The central bank also said policy will stay accommodative “for a considerable time” even after the economy strengthens.

“I am pleased that we have drawn a sharper distinction between what we expect the economy to look like in a few years time and how we expect to set policy based on that outlook,” Dudley said.

The extension of the plan to keep rates near zero until mid-2015 doesn’t represent “greater pessimism” about the outlook, as shown by Fed officials’ increased projections for growth, Dudley said.

“Combining the statement and our projections, the proper inference is that we were acting to secure a better outcome -- more rapid progress towards full employment and price stability,” Dudley said.

Falling Short

Inflation is falling short of the Fed’s 2 percent goal as measured by the personal consumption expenditures price index, which rose 1.3 percent for the 12 months ending in July. Dudley said he concluded at last week’s FOMC meeting that “with substantial slack in labor markets and inflation expectations stable, inflation was likely to remain a bit below our 2 percent longer-run objective.”

“Near term, the economic outlook is that the growth pace is likely to remain disappointing,” Dudley said.

Employers added 96,000 workers to payrolls in August, missing the median forecast of economists surveyed by Bloomberg News, while the jobless rate has been stuck above 8 percent since February 2009. The unemployment rate declined to 8.1 percent from 8.3 percent in July.

Prospects for businesses are “particularly worrisome,” with weakness in fixed investment, he said. Manufacturing has declined in part because of slower growth abroad and “uncertainties” about government cutbacks and tax increases in Washington, he said.

Manufacturing Contraction

Manufacturing in the New York region contracted more than forecast this month amid declining orders, as the New York Fed’s general economic index dropped to minus 10.41, the lowest since April 2009, from minus 5.85 in August, the bank said yesterday. Readings less than zero signal contraction in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

While monetary policy isn’t a “panacea,” a “nudge in the right direction will move us closer to a self-reinforcing cycle of more hiring, more spending, more growth, and more investment,” Dudley said.

Dudley said in response to questions after a second speech in Montclair, New Jersey, that the economy would have performed “far worse” without the Fed’s first two rounds of asset purchases.

The central bank isn’t out of stimulus measures and if the economy needs more “medicine,” policy makers will provide it, Dudley said in response to audience questions. He said the Fed’s tools for easing aren’t “perfect.”

Latest Round

The Fed has so far determined that the cost of lowering the interest rate it pays on excess reserves outweighs the “modest” benefits of doing so, he said. One cost of the Fed’s latest round of mortgage buying is that it increases the interest-rate risk of the central bank’s portfolio, he said.

As president of the New York Fed since January 2009, Dudley, 59, holds a permanent vote on the FOMC.

In New Jersey, “economic activity in the state did not begin to recover until November 2010, more than a year after the nation and New York City,” Dudley said. “Since then, activity has recovered at a moderate pace, although we are still operating below our previous peak.”

Unemployment in New Jersey “remains high” and the housing crisis “continues to take a toll,” Dudley said.

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