Fed's Dudley Hears Yin and Yang on China as He Prepares for FOMC

  • Hooper, Goodfriend give contrasting views at October meeting
  • FOMC seen weighing China weakness against domestic strength

William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York. Photographer: Andrew Harrer/Bloomberg

Federal Reserve Bank of New York President William C. Dudley heard the bull and the bear case for China from two former central bank officials in advance of the Fed’s policy-making meeting this week.

At a semiannual meeting of Dudley’s economic advisory panel this month, Peter Hooper argued that China is successfully shifting its economy away from investment and has the resources to sustain growth, while Marvin Goodfriend warned that it faces a “severe” problem with the adjustment and is at risk of falling into recession. Both presentations from the closed gathering were posted on the New York Fed’s website.

The outlook for China’s economy -- and what it means for the U.S. and the rest of the world -- is expected to feature prominently in discussions at the two-day Federal Open Market Committee meeting that starts Tuesday. Former Fed Chairman Ben S. Bernanke said in a CNN interview aired Sunday that policy makers will need to weigh the weakness in China and other emerging markets against the strength in the domestic U.S. economy in deciding what to do.

Traders in the federal funds futures market in Chicago see virtually no chance that the central bank will raise interest rates this week. They put the probability of an increase by the Fed’s December meeting at about 35 percent, based on data compiled by Bloomberg. The central bank has kept its target for the funds rate -- the rate that commercial banks charge each other for overnight loans -- at zero to 0.25 percent since December 2008.

China’s slowdown and roiling of global markets contributed to last month’s Fed decision to refrain from an interest-rate increase.

Bull View

In taking what he termed the bull view of China, Hooper told the advisory panel on Oct. 16 that the country’s economy would be bolstered in the near term by fiscal stimulus from the government and a revival of the property market. House prices are picking up and land sales are rising again, he added.

In the longer term, support will come from the continued migration of the population from rural to urban areas, said Hooper, who spent 26 years at the Fed and left in 1999 to join Deutsche Bank Securities Inc. in New York, where he is now chief economist.

In his presentation to the panel, Richmond Fed veteran Goodfriend said China needs to reduce investment to avoid wasting resources and adding to excess capacity. But in order to prevent that cutback from precipitating a recession, the Chinese authorities also will have to convince consumers to save less and spend more. 

That will be hard to do, given the uncertain outlook for the country’s economy and the nation’s ability to stamp out corruption, according to Goodfriend, who is now an economics professor at Carnegie Mellon University in Pittsburgh.

While China could ease monetary policy further to help support the job market and guard against deflation, the economic transformation that it’s trying to achieve “promises to be difficult in any case,” he said in a presentation before the nation cut interest rates last week for the sixth time in the past year.

Dudley, who serves as FOMC vice chairman, will help decide which view holds more sway in the interest-rate decision. The day before the advisory panel meeting, he told an audience in Washington that “we have these developments in China and emerging-market economies that could develop in a way” that could come back and hurt the U.S. economy and inflation.

Dudley’s economic advisory panel is composed of about 16 economists from academia and the private sector and meets twice a year to discuss the economy and monetary policy.