The economy needs to meet the Fed's expectations before it slows asset purchases, according to Federal Reserve Bank of New York President and Chief Executive Officer William C. Dudley.

Monetary policy "depends on the progress we make towards our objectives," he said according to prepared text of a press briefing, released by the Fed. "This means that the policy-including the pace of asset purchases-depends on the outlook rather than the calendar. … Economic circumstances could diverge significantly from the FOMC's expectations. If labor market conditions and the economy's growth momentum were to be less favorable than in the FOMC's outlook-and this is what has happened in recent years-I would expect that the asset purchases would continue at a higher pace for longer."

Labor markets, he said "still cannot be regarded as healthy," and many indicators suggest "there remains a great deal of slack in the economy," despite "persuasive evidence of improved underlying fundamentals for much of the private sector of the U.S. economy."

Improved spending on durable goods and housing aren't translating into GDP growth yet as "significant headwinds" remain, especially federal fiscal policy.

"Thus, I continue to see the economy as being in a tug-of-war between fiscal drag and underlying fundamental improvement, with a great deal of uncertainty over which force will prevail in the near-term," Dudley said. "My best guess is that growth for all of 2013, measured on a Q4/Q4 basis, will be about what it has been since the end of the recession. But I believe a strong case can be made that the pace of growth will pick up notably in 2014."

Dudley reminded that even if the pace of purchases were tapered, that by buying assets, the Fed "is adding monetary policy accommodation, not tightening monetary policy. As the FOMC adds to its stock of securities, this should continue to put downward pressure on longer-term interest rates, making monetary policy more accommodative."

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