The unemployment rate decline "overstates" the improvement in the jobs sector and the economy's "forward momentum" has yet to show enough strength to indicate it can support job growth, so the time is not right for the Fed to taper, Federal Reserve Bank of New York President and Chief Executive Officer William C. Dudley said Monday.
"To begin to taper, I have two tests that must be passed: (1) evidence that the labor market has shown improvement, and (2) information about the economy's forward momentum that makes me confident that labor market improvement will continue in the future," Dudley said in a speech at Fordham University, according to prepared text released by the Fed. "So far, I think we have made progress with respect to these metrics, but have not yet achieved success."
Conceding the unemployment rate's falling to 7.3% from 8.1% indicates improvement, Dudley said, "this decline in the unemployment rate overstates the degree of improvement." Other indicators of labor market strength, including "the hiring, job-openings, job-finding rate, quits rate and the vacancy-to-unemployment ratio, collectively indicate a much more modest improvement in labor market conditions compared to that suggested by the decline in the unemployment rate."
Unemployed people still have difficulty finding jobs, he suggested, as the ratio of unemployed workers to jobs is three-to-one, compared to two-to-one from 2003 to 2007.
As for his other test, Dudley said, "The economy has not picked up forward momentum and a 2 percent growth rate — even if sustained — might not be sufficient to generate further improvement in labor market conditions."
Also, he pointed to headwinds, such as fiscal uncertainty "as Congress considers the issues of funding the government and raising the debt limit ceiling."
With no change in " the efficacy and costs" of the asset-purchase program, Dudley said, "I'd like to see economic news that makes me more confident that we will see continued improvement in the labor market. Then I would feel comfortable that the time had come to cut the pace of asset purchases."
He reiterated that a tapering of the purchases is not monetary policy tightening, and should not be seen "as signaling an early exit from this period of unusually low short-term rates. We have established a threshold of 6.5 percent for the unemployment rate as long as we do not expect inflation to exceed 2 ½ percent at a one-to-two year horizon and inflation expectations remain well-anchored. It is likely to take a considerable amount of time to reach the 6.5 percent unemployment rate threshold. Moreover, because the 6.5 percent unemployment rate is a threshold, and not a trigger, depending on the economic circumstances, we might wait a long time after we breach the threshold before we begin to raise our federal funds rate target."
"In addition, it is worth explaining why we anticipate the federal funds rate is still likely to be quite low relative to what Committee participants consider normal over the longer run, even as the Committee gets close to its employment and inflation objectives," Dudley said. "For example, in the September Summary of Economic Projections, the median projection for the federal funds rate in the fourth quarter of 2016 is 2 percent, far below the median long-run federal funds rate projection of 4 percent, at the same time that the unemployment rate and inflation are close to the Committee's long-run objectives."
Referring to Fed Chairman Ben Bernanke's remarks last week, Dudley noted, "the still low federal funds rate projections for 2016 reflect the fact that economic headwinds — such as tight credit standards and ongoing fiscal consolidation — are likely to take a long time to fully abate. As a result, monetary policy will have to keep short-term interest rates very low for a sustained period in order for the Committee to achieve its objectives."