Dudley ‘More Hopeful’ Growth Rebounding as Fiscal Drag Wanes

Federal Reserve Bank of New York President William C. Dudley said he’s “getting more hopeful” the U.S. economy is gaining strength as the drag from fiscal policy wanes.

“While growth in 2013 has been disappointing, I believe a good case can be made that the pace of growth will pick up some in 2014 and then somewhat more in 2015,” Dudley, 60, said in a speech today in Flushing, New York. “As growth picks up, I expect to see more substantial improvement in labor market conditions.”

Economic growth isn’t yet sufficient to ensure the substantial labor market gains that the Fed has said are a prerequisite to any reduction in its $85 billion in monthly bond purchases, Dudley said. Policy makers, aiming to bring down unemployment now at 7.3 percent, have pumped up the central bank’s balance sheet to a record $3.91 trillion.

“We’ve seen quite a bit of improvement” as unemployment has dropped, “but I don’t think we’ve really seen enough growth momentum to give us confidence we’re going to continue to see” gains in the outlook for jobs, Dudley said in response to an audience question.

The policy-setting Federal Open Market Committee won’t taper its purchases until its March 18-19 meeting, according to the median estimate of 32 economists surveyed by Bloomberg News Nov. 8.

‘Nascent Signs’

“There are some nascent signs that the economy may be doing better,” said Dudley, who is also vice chairman of the FOMC. The U.S. economy expanded at a 2.8 percent annualized rate in the third quarter, a faster pace than forecast and a pickup from the 2.5 percent gain in the prior three months.

“The private sector of the economy should continue to heal, while the amount of fiscal drag should subside,” he said.

The New York Fed chief also pointed to payrolls growth as a positive sign. Employment climbed by 204,000 in October, exceeding the highest forecast in a Bloomberg survey of economists. Job growth so far this year has averaged 186,300 a month, compared with 182,750 in 2012.

“I hope that this marks a turning point for the economy,” Dudley said. “Not only do we have some better data in hand, but also the fiscal drag, which has been holding the economy back, is likely to abate considerably over the next few years at the same time that the fundamental underpinnings of the economy are improving.”

Partial Shutdown

A 16-day partial shutdown of the federal government increased the headwinds that the Fed is trying to offset. The shutdown at the start of the fourth quarter may weigh on growth at the end of the year, according to economists surveyed by Bloomberg.

The prospect of an acceleration in growth “remains a forecast rather than a reality at this point,” Dudley said.

“There is substantial uncertainty surrounding this forecast,” he said. “Moreover, there is always the possibility of some unforeseen shock. Thus, we will continue to monitor U.S. and global economic conditions very carefully and will adjust our views on the likely path for growth, inflation and the unemployment rate accordingly.”

Fed Vice Chairman Janet Yellen, nominated to succeed Ben S. Bernanke as chairman, told lawmakers in Washington last week that she’s committed to promoting a strong economic recovery and will ensure stimulus isn’t removed too soon.

Pare Purchases

The FOMC on Oct. 30 decided not to pare bond purchases aimed at stoking growth and combating 7.3 percent unemployment, saying they need more evidence of sustained gains in the economy.

Dudley said in response to audience questions that quantitative easing isn’t “a perfect tool” and has costs and benefits. The Fed is monitoring financial markets for potential bubbles and doesn’t currently see any threats to financial stability, he said.

“At the current time, I don’t see anything that’s big enough or broad enough to be disturbing” to the financial system, Dudley said. “There are a few pockets we’re watching,” including the market for leveraged loans which “seems to be quite frothy.”

The New York Fed chief also said he sees “nothing to suggest inflation is going to be a problem in the near-term.”

“We’re quite convinced the benefits outweigh the costs” from bond purchases by the central bank, he said. “But it’s something that we need to monitor on an ongoing basis.”

Highest Levels

The Fed lowered its benchmark interest rate to near zero in December 2008 and has since sought to step up stimulus by expanding its balance sheet and communicating its intended path for the main interest rate.

The yield on the benchmark 10-year Treasury note fell 0.03 percentage point, to 2.67 percent, at 1:51 p.m. in New York.

A decision to taper bond purchases would not mean interest rates would increase soon, and the Fed has “tried to make it clear that a rise in short-term rates is likely to be a long” way away, Dudley said.

“I anticipate monetary policy is going to be very accommodative for a considerable period of time,” Dudley said. “We’re missing on the same side of both mandates,” meaning the Fed is falling short of its goals to ensure price stability and full employment.