Productivity growth is the wildcard in whether the economy sees a pickup in payroll growth heading into next year, New York Federal Reserve Bank President William Dudley said Wednesday.
Dudley, after repeating remarks he gave Monday on the economy, added to his assessment saying "one of the questions, I think, for 2014 is really what's going to happen to productivity growth because that will really determine how much the real GDP growth translates to actual gains in payroll unemployment."
He told reporters during a briefing that, "I think what I want to see is a pickup in the overall growth in the economy. So it's not just about the payroll employment number that concerns us. It's really 'Will that be sustained in the future?'"
Dudley said he anticipates growth next year to be "something in the 2.5%-3% range, and a little bit stronger than that in 2015," adding that "there's a lot of uncertainty around that forecast."
As for inflation next year, Dudley said he expects "we'll gradually drift back up towards the 2%, but I don't think we'll get there in 2014."
"I don't think inflation will be a problem for several years at a minimum," he said. "There is a quite a bit of slack in the economy ... so we think we have plenty of room to grow. If I were to wish for something next year, I would be wishing for growth stronger than my forecast."
Dudley reiterated he expects labor market improvements to continue into next year. "The problem that we've had over the last few years is that the payroll growth has been OK, not as strong as we like, but strong relative to the underlying growth of the economy," he said.
Dudley also said he expects the housing market to continue to recover, but admitted the impact of higher mortgage rates was worth keeping an eye on. "One thing that we'll continue to asses is how much the housing market has been affected by the rising in mortgage rates since the spring. The data is still sort of coming in," Dudley said.
He said there is still plenty of room for the rate of housing starts to increase, adding that the "sustainable" rate for housing starts is probably in the 1.4-1.5 million range per year.
"The hard part to evaluate is how a big a set back and how long a setback will you have because of increase in mortgage rates," Dudley said. "Right now the data is sort of mixed. There has been a definite slowing, but it's hard to say how long this will last."
And he wanted to better understand why rates were rising. "If mortgage rates are rising because the economy is really robust, then that probably wouldn't be very disturbing to us," Dudley said. "If interest rates are rising because market participants have an unrealistic view about the timing of so-called lift off, that would be very concerning to us."
Rising student loan debt is also a risk the Fed will continue to follow closely, Dudley said following a briefing where he and other NY Fed officials addressed the changing landscape of for-profit organization in higher education.
"It's a prospective risk that we want to look at further," Dudley said of the student loan debt burden which has been climbing in recent years.
"One thing you see in aggregate debt data is a very rapid rise in student loan debt over the last few years, and this is something that potentially has real implications for economic performance going forward..." Dudley said. "So it can actually have pretty significant consequences to the economic impact in principle."
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