NEW YORK - New York Federal Reserve Bank President William Dudley said Thursday that, despite some "encouraging" signs, last Friday's disappointing March employment report served as a reminder that the economy is not yet "out of the woods."

Dudley said weather-related job gains in earlier months may have accounted for some of the weakness in March. But he said more data is needed to see if that was the case.

The March jobs numbers aside, he called the labor market still "unacceptably weak" and also warned of "headwinds" and "downside risks" that threaten a recovery, which he said has been too slow to bring down unemployment significantly.

Meanwhile, he said he is not concerned that rising gasoline prices will have a lasting effect on inflation in remarks prepared for the Syracuse Center for Economic Development.

The vice chairman of the Federal Reserve's policymaking Federal Open Market Committee did not speak directly about monetary policy, but the implications of his comments seemed clear enough: a very accommodative monetary policy stance needs to remain in place, if not augmented.

Last Friday the Labor Department non-farm payrolls rose by just 120,000 last month -- far short of the expected 200,000 and even further below the 246,000 average of the prior three months. Prior months' payrolls were revised up, but only by 4,000.

The unemployment rate dipped from 8.3% to 8.2% in March, but that was in good part due to a reduction in labor force participation after two months of sizable gains in the size of the labor force. Aggregate hours worked fell by 0.2%.

In a speech mostly devoted to regional economic conditions, Dudley said national data "has been a bit more upbeat over the past few months, suggesting that the recovery may be finally establishing a somewhat firmer footing."

He pointed to a quicker pace of vehicle sales, improved housing starts and other hopeful indicators, but then turned more gloomy, as he has in other recent addresses.

"While these developments are certainly encouraging, it is still too soon to conclude that we are out of the woods, as underlined by the March labor market release," he said, recalling that the economy also improved in early 2010 and 2011, "only to fade later in those years."

Dudley also took note of the "unusually mild weather" in the first quarter, which "may have pulled forward some economic activity and hiring."

"In this regard, the somewhat softer March labor market report that was released last Friday may reflect the earlier positive influence of the mild weather on job creation in January and February, although other less sanguine interpretations are also plausible," he said.

"We thus will need to see more data to determine the extent to which the March data represent a transitory weather-related setback," he added.

But whatever those data show, Dudley suggested there is little to cheer about. "Regardless of the importance of the mild winter in distorting the recent economic data, real economic activity has yet to be strong enough on a sustained basis to make a big dent in the overall amount of slack in the U.S. economy."

He said 3% fourth quarter GDP growth is likely to give way to growth of about 2.25% in the first quarter as inventory investment subsides.

"Even with the robust increase of light vehicle sales, overall consumer spending in the first quarter appears to be rising at a similar moderate rate," he said. "At the same time, real disposable income has been flat over the past three months, and the large increase of gasoline prices is likely further sapping consumers' real purchasing power. And growth of business investment spending, which softened in the fourth quarter of 2011, may have been even a little softer in the first quarter of this year."

The projected 2.25% growth pace is roughly equal to the economy's growth potential, and that is not enough, he said.

"We need sustained growth above that rate to absorb the still substantial amount of unused productive capacity," said Dudley. "Thus, our recent growth rates are barely keeping up with our potential."

"Even though the unemployment rate has declined sharply from 9% last September to 8.2 percent in March, it is still unacceptably high," he continued. "In addition, many other measures of the labor market remain weak."

Dudley noted that "the labor force participation rate, the percentage of people employed, and the total number of hours worked in the economy all dropped sharply during the recession and remain well below their pre-recession levels, even taking into account the impact of demographic shifts."

He also pointed to a slump in productivity growth.

What's more, Dudley warned, "we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks." He said high gasoline prices "will sap purchasing power" and also cited "the continued impediments to a strong recovery from ongoing weakness in the housing sector" and "fiscal drag at the federal and state and local levels."

"In terms of downside risks, these include the risk that growth abroad disappoints and the risk of further disruptions to the supply of oil and higher oil prices," he said.

Meanwhile, Dudley suggested that inflation will be the least of the Fed's worries for the foreseeable future.

He said "the overall rate of increase of consumer prices, as measured by the 12-month change of the price index for personal consumption expenditures slowed to 2.3% in February from a recent peak of 2.9% last September" and added, "even though the recent rise of gasoline prices mentioned above could interrupt this pattern, we expect this moderation of overall inflation to resume later this year."

"While the underlying core inflation rate, that strips out volatile food and energy prices, has been somewhat higher than expected a few months back, it appears that the annual rate of core inflation has peaked and we expect it to begin to decline later this year," he said.

Moreover, Dudley said "inflation expectations, which play an important role in the inflation process, remain well anchored."

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