Fed’s Dudley Sees Faster Growth in 2014 as Fiscal Drag Wanes

Federal Reserve Bank of New York President William C. Dudley, who has supported record stimulus, said economic growth will probably quicken in 2014, possibly warranting a reduction in the central bank’s bond purchase program.

“A strong case can be made that the pace of growth will pick up notably in 2014,” Dudley, who serves as vice chairman of the Federal Open Market Committee and has never dissented from a monetary policy decision, said today in a speech in Stamford, Connecticut.

“The private sector of the economy should continue to heal, while the amount of fiscal drag will begin to subside,” Dudley said in prepared remarks that were similar to a June 27 statement he made in New York.

Policy makers are debating when to dial back accommodation following comments by Chairman Ben S. Bernanke on June 19 that the Fed may cut $85 billion in monthly bond buying this year and halt purchases around mid-2014 if the economy meets central bank forecasts. Monthly buying of Treasuries and mortgage-backed securities has pushed up Fed assets to a record $3.48 trillion.

Dudley said in reply to an audience question that he “wouldn’t want to rule out” asset purchases exceeding the current monthly level of $85 billion if the central bank were to be “surprised on the downside” by weaker economic data.

The Fed must ensure that the U.S. does not slip into a prolonged deflationary slump like Japan’s, Dudley said in response to questions at a Business Council of Fairfield County forum.

‘Firmly Anchored’

“Inflation expectations are still pretty firmly anchored consistent with our 2 percent inflation objective and it’s really important that we keep it that way,” Dudley said. “Our policy is basically designed to prevent, to reduce to the absolute minimum amount possible, any risk of a Japanese-style outcome here in the United States.”

The New York Fed president repeated his comment last week that the central bank will probably prolong bond purchases if the economy turns out weaker than Fed forecasts.

“If labor market conditions and the economy’s growth momentum were to be less favorable than in the FOMC’s outlook -- and this is what has happened in recent years -- I would expect that the asset purchases would continue at a higher pace for longer,” Dudley said again today.

Fed officials’ forecasts for growth are more optimistic than private economists, projecting growth of 2.3 percent to 2.6 percent this year and 3 percent to 3.5 percent next year, according to their June 19 forecasts. By contrast, economists in a Bloomberg survey see 1.9 percent growth this year and 2.7 percent growth in 2014.

Reduce Buying

Speculation an improving economy may prompt the Fed to pare bond buying sooner than expected has roiled global markets. The yield on the benchmark 10-year Treasury climbed last week to a 22-month high of 2.66 percent. The Standard & Poor’s 500 Index slipped as much as 4.8 percent in four days after the meeting, while shares in developing nations lost 7.4 percent.

The yield on the 10-year Treasury climbed at 1:44 p.m. to 2.49 percent from 2.48 percent yesterday in New York, while the S&P 500 was little changed at 1,614.71.

Fed officials have said since starting a third round of quantitative easing in September that they’ll continue purchases until the labor market improves substantially. They’ll see new data about employment on July 5.

The Labor Department may say payrolls grew by 165,000 workers in June after rising by 175,000 in May, according to the median forecast of 84 economists in a Bloomberg survey. The report probably will show the jobless rate retreated to 7.5 percent in June, matching April’s four-year low, from 7.6 percent a month earlier, according to the survey.

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