WASHINGTON — The "tug-of-war" between an improving U.S. economy and the current drag on growth from spending cuts and increased taxes means there remains a high level of uncertainty regarding the near-term economic outlook, New York Federal Reserve Bank President William Dudley said Monday.

In a speech to open a New York Fed policy conference, Dudley - who also serves as vice chair of the policy-setting Federal Open Market Committee - said he continues to believe the central bank's aggressive measures to support the recovery have yielded better than expected, while the costs remain the same or lower.

"The good news is that the economic outlook appears to be gradually improving," Dudley said, noting that American households are "far along" in the deleveraging process, the housing market is recovering, banks are healthier and credit conditions are easing, while the corporate sector is highly profitable and "awash in cash."

On the other hand, however, Dudley said U.S. fiscal policy "does not appear well-calibrated to the current set of economic circumstances," adding that, "We have too much fiscal restraint in the short term, and too little consolidation in the long term."

He warned that the level of fiscal restraint this year - about 1.75% of GDP in 2013 - is quite large relative to the forward momentum of the economy.

"Thus, we have a tug-of-war between the improving economy and the current large negative fiscal impulse," he said, but the outcome of that battle will not be known for some time. "In other words, the level of uncertainty about the near-term outlook in the United States remains quite high."

Dudley argued that Fed policy has been effective at fostering easier financial market conditions, even with short-term rates close to zero.

The Fed is currently purchasing $85 billion of longer-term Treasury securities and agency mortgage-backed bonds each month.

"After reviewing the efficacy and costs of this program, I have concluded that that efficacy has been as high or higher than I expected at the onset of the program and costs the same or lower," Dudley said.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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