Dudley Sees Accommodative Policy for ‘Considerable Time’

William Dudley
William Dudley, president of the Federal Reserve Bank of New York. Photographer: Scott Eells/Bloomberg

Federal Reserve Bank of New York President William C. Dudley said he sees a “reasonably favorable” outlook for the U.S. economy, even as elevated joblessness and too-low inflation warrant a high level of stimulus for a “considerable time.”

“I would very much prefer faster economic growth and more rapid progress towards our dual mandate objectives of maximum sustainable employment and price stability,” Dudley said today in the text of remarks given at Brooklyn College in New York. “Hence, the continued need for monetary policy to remain highly accommodative to support the economic recovery to the fullest.”

Dudley said a decline in the jobless rate “significantly overstates the degree of improvement in the labor market” because much of the decrease has been caused by people dropping out of the job market. Unemployment fell to 6.7 percent in December, close to Fed’s threshold for considering an increase in the benchmark interest rate, from 7.5 percent last June.

Dudley is among policy makers who say the central bank should move away from its year-old unemployment threshold of 6.5 percent and instead look at a broader array of indicators to assess the health of the job market. At a forum yesterday, Dudley said he prefers a “qualitative” approach to communicating the Fed’s views on the likely path of interest rates.

“I do expect that growth will be strong enough to lead to continued improvement in labor-market conditions,” Dudley, who is also vice chairman of the policy-setting Federal Open Market Committee, said today.

‘Unusually Uncertain’

“I must caution, however, that the outlook for the unemployment rate is unusually uncertain” because an improving labor market should prompt discouraged workers to seek jobs, Dudley said. “Such developments could result in a more muted rate of decline of the unemployment rate despite the faster growth.”

Labor Department figures showed today that joblessness rose to 6.7 percent in February from 6.6 percent the month before as more people entered the labor force and couldn’t find work. The participation rate, which measures the labor force as a percentage of the working-age population, was unchanged at 63 percent, close to the lowest since 1978.

Treasuries fell for a fourth day after the report, while stocks were little changed. The yield on the 10-year note rose five basis points, or 0.05 percentage point, to 2.78 percent at 1:30 p.m. in New York. The Standard & Poor’s 500 Index declined 0.01 percent to 1,874.60.

‘Reasonable’ Expectations

Market expectations the Fed will raise the main interest rate “around the middle of 2015” are “a very reasonable set of expectations,” Dudley said in response to an audience question.

Employers added more workers than projected in February, indicating the U.S. economy is starting to bounce back from a weather-induced setback. The 175,000 gain in employment followed a revised 129,000 increase the prior month that was bigger than initially estimated, the Labor Department figures showed today.

The U.S. labor market still shows “substantial slack” even with the declines in joblessness, Dudley said.

“It’s very important not to overemphasize the unemployment rate,” he said. “It’s important to look at a broader set of labor-market indicators.”

Harsh Winter

Dudley reiterated his view that harsh winter weather will slow growth during the first quarter, while predicting “sustained growth above the roughly 2.25 percent annual pace that prevailed from mid-2009 through mid-2013.” Yesterday, Dudley said at an event in New York that the weather would shave 0.5 percentage point to 1 percentage point off of the annualized growth rate during the first quarter. The drag won’t be enough to merit slowing the tapering of the Fed’s bond purchases, he said.

Dudley said he sees little immediate threat to the U.S. economy from the crisis in Ukraine.

“The direct channels of the Ukraine back to the U.S. are very mild,” he said in response to an audience question. “We are trying to assess what it means.”

If the situation “led to a disruption of Russian energy supplies to Europe” or “a more adversarial relationship,” there would be greater consequences for the U.S., Dudley said. If we’re in a “shooting war,” that’s a “different situation.”

Policy makers will weigh at a March 18-19 meeting whether to proceed with another $10 billion cut to their bond purchases, which would reduce the monthly pace to $55 billion.

Dudley said today he expects inflation to rise toward the Fed’s 2 percent target. Prices rose 1.2 percent in the 12-month period ended in January, according to the personal consumption expenditures price index, the central bank’s preferred gauge.

“This forecast is based on the projected gradual increase in the levels of resource utilization, a firming in global demand, and the upward pull exercised by stable inflation expectations on actual inflation,” Dudley said.

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