Dudley Tells CNBC Fed May Taper QE Later This Year on Data

Federal Reserve Bank of New York President William C. Dudley said the central bank may reduce the pace of its quantitative easing program in 2013 depending on the economy’s performance.

“If the economy were behaving in a way aligned with the Fed’s June forecast, then it’s certainly likely that the Fed would begin to taper later this year,” Dudley said in an interview with CNBC. “I certainly wouldn’t want to rule it out. But it depends on the data.”

U.S. policy makers last week unexpectedly refrained from reducing their $85 billion in monthly bond buying, saying they need to see more signs of sustained labor-market gains. Chairman Ben S. Bernanke said on Sept. 18 the Fed will alter record accommodation based on “what’s needed for the economy” and not “let market expectations dictate our policy actions.”

Dudley, who is also vice chairman of the policy-setting Federal Open Market Committee, said the markets shouldn’t have been surprised by the Fed’s decision not to taper last week.

“The chairman never said that we were going to reduce the rate of asset purchases in September,” Dudley said. “He said ‘later this year.’ I think that framework that he laid out is still very much intact.”

Dudley said in a speech in New York yesterday that policy makers must “forcefully” push against economic headwinds as the U.S. has yet to show “any meaningful pickup” in momentum. He said yesterday that “the economy still needs the support of a very accommodative monetary policy.”

Forward Guidance

The Fed’s guidance on interest rates will probably outlast the expected departure of Bernanke and the appointment of a new chairman, Dudley said.

“The market should have reasonable confidence in the forward guidance because the reality is the Federal Reserve is not just about the chair,” he said.

The New York Fed chief told CNBC that the central bank’s policies would be consistent under the leadership of Vice Chairman Janet Yellen, should President Barack Obama choose her to succeed Bernanke.

“I’ve known Janet for many, many years,” Dudley said. “I’m a huge supporter. She’s smart. She’s tough. I think she’d be a very fine choice, if that’s where the president decided to go.”

Dudley said the debate over raising the U.S. debt ceiling and the resulting “high level of uncertainty” are creating “a little bit of a cloud right now over the economy.”

“You can certainly imagine that that can cause businesses and households to hold off on their spending decisions,” Dudley said. “So even with a good outcome, it could actually have a negative effect for the economy over the near term.”

Before it's here, it's on the Bloomberg Terminal.