Dudley Sees ‘Very Accommodative’ Policy on Weak Job MarketJoshua Zumbrun
Federal Reserve Bank of New York President William C. Dudley said the central bank should maintain its asset purchases as federal budget cuts restrain economic growth and a labor-market recovery.
“I expect that labor market conditions will improve only slowly and that inflation will remain muted,” Dudley said today in a speech to the Economic Club of New York. “Consequently, it will be appropriate for monetary policy to remain very accommodative.”
Dudley’s comments echo remarks by Fed Chairman Ben S. Bernanke on March 20 that further labor-market gains are needed to consider curtailing record monetary easing. The Federal Open Market Committee decided last week to maintain $85 billion of monthly bond purchases aimed at spurring growth and reducing the 7.7 percent unemployment rate.
Dudley said strength in housing and autos shows that the bond purchases are “gaining additional traction” and boosting the economy more than he expected. If not for government cutbacks, the economy would be growing even more quickly, he said.
“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.
He said inflation expectations “remain well anchored” and the functioning of the government bond market “has actually improved in recent months.” While the markets for high-yield bonds and leveraged loans “do seem somewhat frothy,” the size of those markets is “relatively modest” and investors aren’t highly leveraged.
Dudley rebutted arguments that the danger of incurring losses on its bond portfolio might prompt the Fed to delay an exit from its easing policy.
While the Fed’s remittances to the U.S. Treasury “could even fall to zero for a period” as interest rates rise, he said, “Our mandate is economic not fiscal -- our job is to return the economy to full employment and price stability.”
Dudley’s assessment of “some improvement in labor market conditions” is less optimistic than the Fed’s pledge to continue asset purchases until the labor market has improved “substantially.”
The Fed last week repeated that its benchmark interest rate would stay near zero as long as unemployment remains above 6.5 percent and the outlook for inflation is below 2.5 percent.
Policy makers haven’t agreed to specific numerical thresholds for ending or reducing their purchases of mortgage-backed securities and Treasury debt.
In response to audience questions, Dudley said that it’s “too soon to take much cheer from the recent economic news that’s actually been better than expected because we’ve seen these kinds of accelerations before, and they’ve often been short-lived.”
Dudley said the “greatest danger” to growth is tighter fiscal policy.
“It’s clearly possible that in 2014 or even earlier we could start to see the economy pick up steam more rapidly than most people’s forecasts,” he said. “There are a lot of really good things underneath the surface that are being kind of camouflaged by the fiscal drag we’re going through at present.”
While the unemployment rate is “modestly lower” and payroll growth is “a bit higher,” Dudley said in his prepared remarks, the employment-to-population ratio and the rates of job finding are “essentially unchanged.”
“This suggests that the labor market is far from healthy,” he said.
‘Sense of Progress’
Bernanke, in his press conference last week, said any pullback would be based on “a range” of variables. Trimming the bond-buying program would also serve as a signal to investors of “some sense of progress,” he said.
Some measures of labor-market health have shown improvement since the central bank began its third round of large-scale asset purchases last September.
Monthly payroll gains have averaged almost 200,000, compared with 133,000 in the previous five months. In February, the economy added 236,000 jobs, and the jobless rate fell to 7.7 percent from 7.9 percent. First-time claims for unemployment benefits averaged 339,800 over the past four weeks, the lowest since February 2008.
Even so, the job market is far from making up the losses it sustained during the 18-month recession that ended in June 2009. The economy lost 8.8 million jobs as a result of the recession, and it has since regained 5.7 million.
Dudley said that once the economy has gained more strength, the Fed should consider reducing the pace of purchases.
“At some point, I expect that I will see sufficient evidence of economic momentum to cause me to favor gradually dialing back the pace of asset purchases,” he said. “Of course, any subsequent bad news could lead me to favor dialing them back up again.”
The Fed’s stimulus and an improving economy have helped push stocks to new highs, with the Dow Jones Industrial Average exceeding its prior peak from October 2007.
Stocks fell today amid concern Cyprus’s bank restructuring plan will pave the way for losses on deposits in other European nations. The Dow lost 0.4 percent to 14,457.38 at 2:46 p.m. in New York.
Economists in a Bloomberg survey expect the economy to grow 1.9 percent this year and 2.7 percent in 2014. Unemployment will average 7.7 percent this year and decline to 7.2 percent next year, according to the forecasts.
In his remarks, Dudley estimated that “significantly more restrictive” fiscal policy would reduce gross domestic product by 1.75 percent this year. That includes federal spending cuts, the increase in the payroll tax and higher tax rates on the highest earners, as well as tax increases associated with the health-care overhaul.
Congress mandated $1.2 trillion in across-the-board spending reductions, to begin this year and be spread over nine years, as part of a 2011 deal to increase the U.S. debt limit. The reductions are to be split almost evenly between defense and non-defense spending.
The nonpartisan Congressional Budget Office estimates the cuts, known as sequestration, could subtract 0.6 percentage point from gross domestic product in 2013, costing the economy 750,000 jobs.
The central bank lowered its target interest rate almost to zero in December 2008 and has kept it there. The Fed’s balance sheet has grown during three rounds of large-scale asset purchases intended to spur the economy by pushing down long-term rates on everything from mortgages to car loans.