Fed’s Dudley Says Economy Now Enduring Heaviest ‘Fiscal Drag’

Federal Reserve Bank of New York President William C. Dudley said the U.S. economy is currently facing the heaviest burden yet from federal spending cuts and tax increases.

“Over the next three-to-six months, if the U.S. economy continues to show signs of improvement that will be very, very important,” Dudley said in an interview with CBS News that was posted today on its website. “The fiscal drag is at its most intense point today. If the economy can sort of power through that, I would actually think the second half of the year and 2014 would be better.”

Dudley’s remarks echoed his speech yesterday to the Economic Club of New York calling for “very accommodative” monetary policy to reduce the 7.7 percent unemployment rate.

The New York Fed chief yesterday 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.

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