Dudley Favors Continuing QE After March Job-Market Slowdown
Federal Reserve Bank of New York President William C. Dudley said a slowdown in the pace of employment growth in March highlights the need to maintain the pace of bond purchases.
“After an encouraging pickup in the pace of job creation around the turn of the year, the employment report for March showed a gain of only 88,000 jobs,” Dudley said today according to prepared remarks for a speech in Staten Island. “While I don’t want to read too much into a single month’s data, this underscores the need to wait and see how the economy develops before declaring victory prematurely.”
Dudley expressed support for continuing Chairman Ben S. Bernanke’s $85 billion a month of bond purchases in a speech last month. That was before the March jobs report from the Labor Department showed the unemployment rate fell to 7.6 percent, as people abandoned the labor force, and the pace of employment creation slowed from the 268,000 jobs added in February.
The slowdown, “along with the large amount of fiscal restraint hitting the economy now, makes me more cautious,” Dudley said. “We have seen only a moderate improvement in labor market conditions over the past six months or so.”
Dudley’s depiction of “moderate” labor-market improvement falls short of the “substantial” gains that Fed officials have identified as their goal for winding down their record monetary stimulus.
Treasury 10-year notes fell for the first time in four days as investors sought higher yielding assets amid a recovery in gold and equities, damping the refuge appeal of government debt.
The U.S. 10-year yield rose five basis points, or 0.05 percentage point, to 1.73 percent at 8:22 a.m. in New York after falling as low as 1.67 percent yesterday, the lowest level since Dec. 12. Standard & Poor’s 500 Index futures expiring in June added 0.9 percent to 1,557.0. The equity benchmark plunged 2.3 percent yesterday.
“I see the current pace of asset purchases as appropriate,” Dudley said at a Staten Island Chamber of Commerce breakfast. He devoted about half of his remarks to a discussion of regional economic conditions, saying that some Staten Island neighborhoods are “not yet back to normal” following Superstorm Sandy, which struck the region in October.
“The situation is improving, and I expect that this recovery will continue over the coming year,” Dudley said of the storm’s aftermath. “We are going to continue to examine where we can provide assistance in supporting this effort.”
Dudley’s remarks on monetary policy echoed his views from a March 25 speech at the Economic Club of New York.
“I remain confident that the benefits of a stronger and earlier economic recovery will trump the costs associated with our unconventional monetary policy measures,” Dudley said in that speech.
Dudley said today that he expects the economy to grow 2 percent to 2.5 percent this year and the unemployment rate to “decline only modestly through the rest of the year.”
Improvements in housing and consumer and business spending are being overshadowed by a “fiscal drag” of government spending cuts and tax increases, he said. A decline in retail sales in March indicated that “the tax increases that occurred at the start of the year may be beginning to have a material effect.”
“In the near term, there is considerable uncertainty about the outlook, particularly because the multiplier effects from fiscal drag” and budget cuts in Washington are still unclear, he said. “This uncertainty should gradually decline -- for better or for worse -- over the coming months.”
Dudley said “underlying measures of inflation are subdued” and expectations for future price increases “well anchored.”
“The risk that inflation could significantly exceed our 2 percent objective is quite low over the next few years, even if the economy were to strengthen considerably.”
Answering audience questions after his speech, Dudley said the eventual return to more normal monetary policy will have to be done in a “well-considered way.”
Ending asset purchases will just be “the first part of a very long process” and it will be “on us to communicate clearly so people don’t overreact to whenever that first move comes,” he said.
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