Dudley Says U.S. Households, Banks Well-Equipped to Face Shocks

The greatest threat currently facing the U.S. expansion is a major shock but the good news is that U.S. households and banks are better able to absorb any adverse economic developments than they were when the last recession hit, said Federal Reserve Bank of New York President William Dudley.

“Key sectors of the U.S. economy, such as the household sector, seem to be in good shape,” Dudley said in remarks prepared for a press briefing Friday in New York. “The financial system is also clearly much stronger, with the banking system much better capitalized and with much larger liquidity buffers than in the years preceding the financial crisis.”’

The New York Fed chief’s comments follow a turbulent week in financial markets fanned by increasing concerns over the outlook for global growth. In two days of congressional testimony Wednesday and Thursday, Fed Chair Janet Yellen answered questions from lawmakers about the possibility of a recession and the tools the central bank has to combat it, including negative interest rates.

“Expansions end either because a significant inflation risk emerges that requires a sharp tightening of monetary policy, or the economy is adversely impacted by a large shock that cannot be offset by monetary policy in a timely manner,” Dudley said Friday. “Since the possibility is low that a significant inflation risk would emerge over the near term, this means that the main danger facing the current expansion is the risk of large, adverse shocks.”

“Given that the labor market still appears to have some excess slack and inflation is below the Federal Reserve’s objective, monetary policy is appropriately still quite accommodative despite the advancing age of the expansion,” Dudley said. “While this limits to an extent the degree to which monetary policy can aggressively respond to any adverse events, the good news is that the economy is more resilient to any shocks.”

Dudley’s comments were released alongside the New York Fed’s quarterly report on U.S. household debt and credit trends. The data showed U.S. household debt rose to $12.1 trillion in the final three months of 2015. Student loan debt rose $29 billion to $1.2 trillion.

“At this point, the great majority of the bad debt from the boom years has been charged off and new foreclosures are at the lowest level we’ve seen in our data,” Dudley said.

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