New York Federal Reserve Bank President William Dudley Monday declared his support for aggressive monetary policy in the current economic environment, and said he does not expect the central bank to take its foot off the accelerator until it is confident the economic recovery is "securely established."
In prepared remarks to the annual meeting of the National Association for Business Economics, Dudley also made the case for front-loading monetary policy measures while also arguing that the costs of the Fed's unconventional policy measures "pale" in comparison to not having a sustainable recovery.
"Although the outlook for the U.S. economy remains somewhat cloudy as we look into 2013, I remain a long-run optimist about where we are headed," he said. "If uncertainties about the U.S. fiscal path and the future of the eurozone were resolved in a constructive manner, growth could pick up more vigorously than anticipated."
However, in announcing a new round of aggressive measures following its September meeting, the Fed's policymaking Federal Open Market Committee -- of which Dudley is the Vice Chair -- made clear it expects that highly accommodative monetary policy will remain appropriate for a considerable time after the recovery strengthens.
"Consistent with this, if we were to see some good news on growth I would not expect us to respond in a hasty manner," he said.
"Only as we became confident that the recovery was securely established, would I expect our monetary policy stance to evolve to ensure that it remained appropriate to achievement of our objective: maximum sustainable employment in the context of price stability," Dudley added.
On the recent actions by the Fed, Dudley said he favors "an aggressive monetary policy in the current situation," but again stressed that monetary policy is not a panacea.
He noted the drag fiscal uncertainty is having on the economy -- restraining hiring and investment -- and urged both Congress and the White House to act.
Also, the recovery has been "subpar" due to the weak global recovery, a U.S. population that is aging, and the impact of monetary policy has been less powerful because of partially impaired housing finance.
"In particular, attention should be paid to what could be done to capitalize on the recent stabilization in house prices to improve access to mortgage credit and to foster competition in mortgage origination to ensure a more complete pass-through of low secondary mortgage rates to households," Dudley said.
With regards to the impact of monetary policy, "I also conclude that, with the benefit of hindsight, monetary policy needed to be still more aggressive. Consequently, it was appropriate to recalibrate our policy stance, which is what happened at the last FOMC meeting," he added.
Dudley also said the potential for policy to become less powerful over time -- or attenuated -- is an additional reason to be aggressive.
"A more front-loaded program would avoid greater attenuation compared to a policy that started out less aggressive but added stimulus gradually over time," he said, with one benefit being "it would likely be more successful in generating the desired recovery more quickly."
Dudley also argued that asset purchases by the central bank make financial conditions more accommodative, and also strengthen the credibility of the forward guidance on interest rates.
However, many have voiced fears about the costs of the Fed's unconventional measures and Dudley sought to ease those concerns.
He called worries that assets buys could complicate the Fed's exit strategy "misplaced," and said repricing should prove manageable when the time comes for the Fed to begin asset sales.
As for the costs that having rates low for so long will have on savers, Dudley said in the long run, even savers would be better off in a world in which aggressive monetary policy generates a strengthening recovery that eventually permits the normalization of interest rates.
"So I do not view the effect of low rates on savers as a reason to be less accommodative," he said.
Overall, "while the costs are real and need to be carefully evaluated, they pale relative to the costs of not achieving a sustainable economic recovery," Dudley said. "A failure in that regard would lead to widespread chronic unemployment."
Left too long, he warned, "long term unemployment will eventually lead to permanent atrophying of skills that will restrain the economy's growth potential."
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