Fed’s Dudley Reduces His Expectations for U.S. Economic Growth
Federal Reserve Bank of New York President William C. Dudley said policy makers gave a “sober assessment” of the U.S. economy this week and that he cut his forecast for growth.
“Economic growth so far in 2011 has been quite a bit slower than we expected earlier in the year,” Dudley, 58, said today at the bank’s New York headquarters. “In the last few months conditions in the labor market have deteriorated again and the unemployment rate edged up. Household spending has flattened out, and the housing sector is depressed.”
The policy-setting Federal Open Market Committee this week pledged to keep its benchmark interest rate near zero until at least mid-2013 to revive an economic recovery that’s “considerably slower” than anticipated. Fed officials also “discussed the range of policy tools” available to boost growth and are “prepared to employ those tools as appropriate,” the FOMC said.
“Following the release of the FOMC’s statement, market interest rates generally moved lower, which should help provide some additional support for economic activity and jobs,” Dudley said. “I would note, however, that conditions remain unsettled and the equity market in particular remains very volatile.”
The Fed made the rate pledge after Standard & Poor’s downgraded the U.S. government’s credit rating and Europe’s debt crisis worsened, roiling markets worldwide. The S&P 500 Index of stocks fell 18 percent from a three year high on April 29 through Aug. 8. The index rose 0.8 percent to 1,182.15 at 11:36 a.m. in New York trading.
Dudley said that he has downgraded his forecast while expecting to see “stronger growth” in the second half of the year because “some of the weakness” in the first six months was due to “temporary factors” like higher commodity prices and supply chain disruptions caused by the earthquake in Japan.
“But it is clear that not all of the weakness was due to these one-time factors -- and in light of this, I have revised down my expectations for the pace of recovery going forward,” Dudley said.
Dudley declined to quantify his forecast in response to questions from reporters. He said while he’s not expecting the economy to slip back into another recession, the risks of a relapse have increased.
“We do not expect a double-dip recession but clearly when the economy is growing more slowly you would have to say that the risks have risen somewhat,” Dudley said. “We’re still expecting our economy to accelerate in the second half of the year.”
Jury ‘Still Out’
“The jury’s still out” on the specific pace of growth in part because “we’ve had a lot of turbulence in financial markets,” he said, adding that the impact from market turmoil will depend on how long it persists, and to what extent financial conditions tighten as a result.
Growth slowed to a 1.6 percent rate during the second quarter from a year earlier. About 70 percent of the time when the pace has fallen below 2 percent, a contraction has followed within a year, according to data since World War II in an April study by Jeremy Nalewaik, a Fed board staff economist.
Dudley repeated his call for U.S. fiscal improvement “over the long-term” and noted “some progress” through this month’s agreement to raise the debt limit. He sees “no sign in the markets” that there’s “any lack of doubt” that the U.S. is committed “to do what’s necessary” to address fiscal shortfalls.
Referring to the U.S. credit rating cut, Dudley said, “my hope is that the downgrade will be viewed as a shot across the bow that will reinforce” the “determination to do what’s necessary.”
“Obviously the Treasury was unhappy with the downgrade,” but “let’s make a positive out of it that -- this is a warning sign of what happens if you don’t do what you need to do in a timely way. So, let’s get on with it.”
Chairman Ben S. Bernanke signaled he wouldn’t let dissent from three policy makers over the rate commitment -- the most opposition to a FOMC decision in 18 years -- stop him from expanding record monetary stimulus. Dudley, vice chairman of the FOMC, voted with Bernanke.
While the FOMC didn’t specify which tools it’s considering using, Bernanke said in July that if the recovery weakens the Fed may weigh beginning a third round of bond purchases or pledge to keep its balance sheet at a record high for a longer period of time. The Fed purchased $1.7 trillion of Treasury and mortgage debt from December 2008 to March 2010 and another $600 billion of Treasuries from November through June.
Dudley said growth in the New York Fed’s district “though somewhat stronger than at the national level, has nonetheless been disappointing.”
Employment growth in the region has been hurt by government cutbacks, and “another potentially troubling development” are job losses in the financial industry, Dudley said.
“It is difficult to say when the pace of job growth will pick up,” Dudley said. Jobs are being added in industries like health care and education, and some industries are hiring to replace earlier layoffs, such as administrative support, he said.
New York City’s securities industry has lost nearly 4,000 jobs since April, Dudley said. “More difficulties may lie ahead” in the industry, he said, noting “recent announcements of consolidations and layoffs.”
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