Federal Reserve Bank of New York President William C. Dudley said he is focusing on “unacceptably high” joblessness as he considers whether the central bank should increase its asset purchases.
“I will be assessing the employment and inflation outlook in order to determine whether we should continue Treasury purchases into 2013,” Dudley, 59, said today in a speech at Pace University in New York. “The Fed will promote maximum employment and price stability to the greatest extent our tools permit, and we will stay the course.”
Fed officials are considering whether to step up record accommodation to offset the scheduled expiration next month of Operation Twist, a program swapping short-term Treasuries with longer-term debt. A “number” of Fed officials said at their policy meeting last month that the Fed next year may need to expand its monthly purchases of bonds, according to the minutes of the Federal Open Market Committee’s Oct. 23-24 gathering.
“Although the economy continues to expand, we must grow faster if we are to put all of our jobless workers and idle businesses back to work,” said Dudley, who is also vice chairman of the policy-setting FOMC. Consumer prices will probably increase “at or slightly below our 2 percent longer-run objective over the next few years.”
Dudley said he will “focus on the labor market outlook, not just its current state” in determining whether to add to the Fed’s stimulus. Discouraged workers have “depressed the participation rate and held down the official unemployment rate,” he said.
The Standard & Poor’s 500 Index increased 0.4 percent to 1,415.26 at 12:15 p.m. in New York. The yield on the benchmark 10-year Treasury note dropped one basis point, or 0.01 percentage point, to 1.62 percent, according to Bloomberg Bond Trader prices.
The central bank is buying $40 billion in mortgage debt each month and has pledged to keep its benchmark interest rate near zero through mid-2015 to boost growth and reduce 7.9 percent unemployment.
“We will continue to do our part to push the economy towards maximum sustainable employment in the context of price stability,” the New York Fed chief said. “Yet, it is important to recognize that our tools are not all-powerful -- monetary policy is not a panacea for all that ails our economy.”
The economy expanded more than previously estimated in the third quarter as a narrower trade deficit and gains in inventory overshadowed a smaller gain in consumer spending, a report today showed.
Gross domestic product grew at a 2.7 percent annual rate, up from a 2 percent prior estimate, according to revised figures from the Commerce Department. The median forecast of 82 economists surveyed by Bloomberg called for a 2.8 percent gain. Household purchases climbed at a 1.4 percent rate, the least in more than a year and down from a previously reported 2 percent rate, and income gains were also cut.
In its Beige Book report yesterday, the Fed described the pace of expansion in recent weeks as “measured,” with gains in consumer demand and housing tempered by a slowdown in manufacturing and the impact of superstorm Sandy.
“Consumer spending grew at a moderate pace in most districts, while manufacturing weakened,” the central bank said in its survey, which is based on reports from the Fed’s 12 district banks. “Contacts in a number of districts expressed concern and uncertainty about the federal budget, especially the fiscal cliff.”
Sandy will have a “modest negative effect” on growth for the fourth quarter of about 0.25 percentage point to 0.5 percentage point, Dudley estimated.
“I expect a negative impact on fourth quarter national and regional economic growth, but a minimal long-run effect nationally and regionally,” Dudley said.
Dudley said in response to audience questions that tougher bank regulation is “absolutely necessary” and shouldn’t impair the ability of consumers and business to access credit.
While some banks are “unhappy” with higher capital requirements, U.S. banks are now in “good shape” as a result, Dudley said. The Fed is committed to ending the risk posed by too-big-to-fail financial institutions, he said.
Lawmakers must address the so-called fiscal cliff or risk an economic contraction that is “likely to be larger than normal when monetary policy is operating at the zero lower bound for interest rates,” Dudley said. Failure to come up with a “truly credible” consolidation plan would harm the nation’s standing across the world, he said.
“If a credible bipartisan agreement is reached, it will strengthen global confidence in the U.S. and underscore to the world that our country remains a great place to do business and invest in,” Dudley said. “Failure would suggest a degree of political dysfunction that could undermine U.S. economic leadership and could encourage global corporations and investors to invest elsewhere.”
The economy has been boosted by a recovery in housing, the industry at the heart of the financial crisis and 18-month recession that ended in June 2009. The S&P/Case-Shiller index of property values in 20 cities advanced 3 percent in September from a year earlier, the most since 2010. The Conference Board’s index of consumer sentiment climbed to a four-year high this month.
“Many parts of our region were showing a stronger pace of growth than the country as a whole before the storms hit -- and I am hopeful that Sandy will not have pushed us off this trajectory for long,” Dudley said.
The housing recovery is an “important part of this renewed growth, although certain communities are still weighed down by lingering high rates of delinquencies and foreclosures and some others have suffered appalling damage from Sandy,” he said.