Dudley Says Labor Market Slowdown Would Tilt To Easing
Federal Reserve Bank of New York President William C. Dudley said he would favor additional easing if the labor market falters or risks to growth were to rise substantially.
“If the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing,” Dudley said in a speech today in New York.
Dudley’s comments reinforce the view expressed at the April meeting of the Federal Open Market Committee, when several policy makers said a loss of growth momentum or increased risks to their outlook could warrant additional action, according to minutes of the gathering. Policy makers have relied on communications about their expectations for the path of interest rates to provide additional stimulus after cutting their benchmark rate to near zero in December 2008.
The FOMC said last month it anticipated keeping its benchmark rate near zero until at least late 2014, reiterating a plan announced in January.
The number of Americans filing first-time claims for unemployment insurance payments declined last week, pointing to gradual improvement in the labor market. Applications for jobless benefits decreased by 2,000 to 370,000 in the week ended May 19 from a revised 372,000 the prior week, Labor Department figures showed today. The initial claims matched the median estimate in a Bloomberg News survey of economists.
A Labor Department report on June 1 may show job growth picked up this month. Employers probably added 148,000 workers to payrolls in May, according to the median estimate in a Bloomberg News survey of economists, compared with a gain of 115,000 in April that was the smallest in six months.
Dudley endorsed the current FOMC policy, including the 2014 interest rate plan, while saying it could change in response to economic data that differed from forecasts.
“As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs,” Dudley said.
If more easing were needed, the Fed could further expand its balance sheet with another asset-purchase program or extend the duration of its Treasury portfolio, Dudley said.
The policy lesson from Japan’s experience with deflation is “that you want to be more aggressive,” Dudley said in response to audience questions. The U.S. took that into account in fighting the worst financial crisis since the Great Depression, he said.
The Standard & Poor’s 500 Index fell 0.4 percent to 1,313.95 at 2:34 p.m. in New York, on signs China’s economy is showing strains from Europe’s debt crisis. The yield on the benchmark 10-year Treasury note climbed 0.03 percentage point to 1.76 percent.
The U.S. economy is “continuing to slowly recover” and employment growth has “picked up somewhat,” the New York Fed leader said. While “growth will gradually strengthen” over the next few years, lower government spending and Europe’s fiscal crisis are likely to be drags, he said.
“Significant downside risks remain, especially those related to the challenges in Europe and how the potential ‘fiscal cliff’ in the United States will be resolved after the fall election,” he said. “Even if these risks do not materialize, I anticipate only slow progress toward full employment.”
Dudley said in response to audience questions that government debt-service costs will “go up significantly” when the Fed normalizes its policy and raises rates. That will make fiscal challenges more difficult, though “that is not our problem” because the Fed is focused on meeting its dual objectives of price stability and maximum employment, he said.
Dudley spent most of his speech discussing the use of monetary policy rules such as one formulated by Stanford University professor John B. Taylor. Such equations can be useful in guiding policy, yet the Fed may need to be more accommodative than such rules suggest because the damage from a tighter policy is greater right now, he said.
Fed officials have discussed the usefulness of simple rules as a guide for policy makers and the public. The idea has been promoted by Philadelphia Fed President Charles Plosser in public comments.
Dudley said in an interview with CNBC today that he doesn’t currently see the need for additional action to ease policy.
“My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front,” Dudley said, according to a transcript of the interview posted on the New York Fed’s website.
The Fed has kept its benchmark rate near zero since December 2008 and bought $2.3 trillion of bonds in two rounds of asset purchases. A Fed program to extend the average maturity of its portfolio holdings is scheduled to end in June, and that probably won’t have a “big effect” on markets, Dudley said in the CNBC interview.
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