New York Federal Reserve Bank President William Dudley Monday made clear monetary policymakers' focus when gauging the progress of the recovery will go beyond a month or two's worth of jobs data, and will focus more on the longer-term trend of the labor market.
Taking questions from the audience following a speech at the annual meeting of the National Association for Business Economics, Dudley also said the Fed needs to further clarify what its parameters are for keeping interest rates at historically low levels till the middle of 2015.
Last month, the Fed's policymaking Federal Open Market Committee announced it will buy $40 billion in mortgage-backed securities a month, and said it will continue asset purchases until it sees a substantial improvement in the labor market outlook.
Dudley, who is the vice chair of the FOMC and a permanent voting member, said the committee will be looking for two things: improvement in the labor market, and an expectation that the dynamics of the U.S. economy are such that "you would reasonably expect and be highly confident that the improvement would continue in the future."
So the FOMC is not just looking for a spot improvement in the labor market, Dudley said. Rather, "it has to be a view that the improvement in the labor market is likely to continue and persist over time."
The outlook will be key, Dudley emphasized, "it's not just a strong payroll employment report or two. It's the idea that this is going to continue in the future."
He noted that last winter saw a pickup in jobs growth, even as real GDP growth was quite weak.
"So that was a case where the payroll growth really wasn't pointing towards a continued improvement in the labor market outlook because the GDP growth didn't support it," Dudley said.
Also in the statement following its September meeting, the FOMC said it expects short-term interest rates to remain exceptionally low until mid-2015.
Dudley said it would be nice if the FOMC could communicate "more clearly" what the parameters are for rates to remain so low for that length of time.
Measuring the economy's performance is more than just the unemployment or inflation rate, he said, and the challenge is to "come up with some simple thresholds that we think are rich enough to really frame our decisionmaking."
"My own view is that I would like to provide more guidance about what the date rests on," Dudley said.
Still, he added that the FOMC's summary of economic projections, provided on a quarterly basis, and Bernanke's news conferences "do provide quite a bit of material that gives you some sense of what's the basis of the date."
Asked for his thoughts on the Fed lowering the interest paid on excess reserves as a way to ease monetary conditions, Dudley said the effect from such a move would not be "really big" compared to the consequences for monetary policy.
Lowering the IOER could potentially disrupt short-term money markets, which Dudley noted are already "under some strain" due to the absolute low level of interest rates.
"So in making that judgment of costs and benefits -- up to now at least -- we've decided that the costs of reducing the interest rate on excess reserves further outweighs the benefits," he said. "But that's a judgment call."
There is no question, Dudley said, that the central bank's actions are impacting term premium in the market for U.S. government securities. However, he argued that the more duration the Fed owns, the less risk there is for the private sector when interest rates are normalized.
"So I think this is a deliberate decision of monetary policy to make financial conditions more accommodative, I wouldn't characterize the Treasury market as bubble, I would characterize it as a lever of policy that we are working on to flatten the yield curve to make financial conditions broadly more accommodative," he said.
On the question of whether energy prices and slow productivity growth could be impeding the impact of monetary policy, Dudley noted that while gasoline prices are very high, natural gas prices have come down "pretty dramatically" over the last few years.
So with the energy picture in the United States mixed, "I don't think it's a big impediment to the recovery," he said.
With regard to slow productivity growth, Dudley said it is too soon to conclude what the country's productivity trajectory will be.
"I wouldn't be particularly pessimistic about the productivity outlook going forward," he said.
As for the looming fiscal cliff and how it affects monetary policy decisions, Dudley simply said the manner in which Congress and the White House address the issue post-election will factor into the Fed's decisionmaking.
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