NEW YORK – The Federal Reserve has been laboring to beef up the economy and now that there are signs the recovery is strengthening, the Fed needs to keep on course, Federal Reserve Bank of New York President and Chief Executive Officer William C. Dudley said.
“It is important to emphasize that we at the Federal Reserve have been expecting the economy to strengthen,” Dudley told the Queens Chamber of Commerce Friday morning, according to prepared text of his remarkes, which was released by the Fed. “We provided additional monetary policy stimulus via the asset purchase program to help ensure that the recovery regained momentum. A stronger recovery with more rapid progress toward our dual mandate objectives is what we have been seeking. This is welcome and not a reason to reverse course.”
The labor market recovery should increase “considerably more rapidly” in the near future, he said, “We should welcome this. A substantial pickup is sorely needed.” He estimated that if 300,000 jobs were added a month, there would still be “considerable slack” in the jobs market at the end of next year.
The economy is not out of the woods yet, he warned. “The coast is not completely clear—the healing process in the aftermath of the crisis takes time and there are still several areas of vulnerability and weakness. In particular, housing activity remains unusually weak and home prices have begun to soften again in many parts of the country. State and local government finances remain under stress, and this is likely to lead to further spending cuts, tax increases, or job losses in this sector that will offset at least a part of the federal fiscal stimulus. And we cannot rule out the possibility of further shocks from abroad. For example, higher oil prices cut into household purchasing power, and the situation in the Middle East and Africa remains uncertain and dynamic. Also, we cannot ignore the risks stemming from the longer-term fiscal challenges that we face in the United States.”
He attributed the improving economy to improvement in household and business balance sheets, monetary policy and fiscal policy support, and strong growth abroad.
He warned, “We also need to remain watchful for signs that low interest rates could foster a buildup of financial excesses or bubbles that might pose a medium-term risk to both full employment and price stability. Fortunately, current risk spreads on U.S. financial assets are not unduly compressed. This suggests that people are still being relatively cautious about taking on a lot of financial asset risk.”
He suggested that recent commodity price pressures should not be an impetus to raise rates. “Why? First, despite the general uptrend, some of the recent commodity price pressures are likely to be temporary—due to poor weather or geopolitical uncertainties. This is certainly what is anticipated by market participants,” he said.
“Second, even if commodity price pressures were to prove persistent, they have a smaller impact in the United States than they do in many other countries.”
Also, he said the Federal Reserve has been successful anchoring inflation expectations and limiting pass-through. “Thus, while rising commodity prices may be giving some of you a bad headache,” he said, “they are not likely to lead to a sustained rise in inflation to levels inconsistent with our dual mandate.”
