Federal Reserve Bank of New York President William C. Dudley said the Fed needs to better understand how its bond buying provides stimulus to the economy.
“We don’t understand fully how large-scale asset purchase programs work to ease financial market conditions,” Dudley said today in a speech in Philadelphia. “Is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?”
Dudley also said central bank economists confront a “riddle” on whether the decline in U.S. unemployment to 7 percent in November will reverse as more workers return to the labor force.
“The U.S. unemployment rate has declined more sharply than one might expect given the economy’s growth rate over the past few years,” Dudley said. “Is this permanent or will it reverse if the economy continues to grow and the pressure on labor market resources increases in the coming years?”
The Fed last month trimmed its monthly bond purchases to $75 billion from $85 billion, taking the first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s.
Dudley used his remarks to discuss how research at the regional bank helps the Fed understand the economy and address policy questions.