Tags: Fed | Options | Bond | Buying

Dudley: Fed Options to Spur Economy Include Bond Buying

Thursday, 17 Nov 2011 01:35 PM

 

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Federal Reserve Bank of New York President William C. Dudley said there’s more the Fed could do to boost the economy, such as providing clearer guidance on how long interest rates will stay low or resuming asset purchases.

“I am deeply unhappy with the current forecast of prolonged high unemployment, and will continue to review whether there is more that we could do that would bring more benefit than cost,” Dudley, 58, said in the text of remarks today at the U.S. Military Academy in West Point, New York.

Dudley said it would be “desirable” for the Fed to offer more guidance on the economic conditions that policy makers would need to see before raising interest rates from close to zero. He also said that if the Fed opted to buy more bonds, “it might make sense” for much of those to consist of mortgage- backed securities to boost the housing market.

Fed officials are divided over whether the central bank should wait to see if the economy deteriorates before taking additional steps to lower borrowing costs and boost job creation. Fed Chairman Ben S. Bernanke said Nov. 2 that additional stimulus “remains on the table.”

“We could purchase more longer-term financial assets,” Dudley said today. “If additional asset purchases were deemed appropriate, it might make sense to do much of this in the mortgage-backed securities market. This would have a greater direct impact on the housing market and would be less likely to disrupt market functioning compared with further purchases in the Treasury market.”

Evans Dissent

Chicago Fed President Charles Evans, who voted against the Federal Open Market Committee’s Nov. 2 decision to refrain from further easing, this week urged “increasing amounts of policy accommodation.” The Dallas Fed’s Richard Fisher, who opposed stimulus measures in August and September, voiced a more optimistic assessment on Nov. 14, saying he sees decreasing odds of additional easing with the economy “poised for growth.”

U.S. stocks fell today as concern about higher borrowing costs in Europe overshadowed a drop in American jobless claims and higher-than-forecast housing starts. The Standard & Poor’s 500 Index fell 1.7% to 1,216.45 at 1:02 p.m. in New York. The yield on the 10-year Treasury note declined two basis points to 1.98 percent.

August Pledge

The FOMC pledged in August to keep its target interest rate near zero at least until mid-2013, and policy makers agreed on a plan in September to cut borrowing costs by lengthening the maturity of the Fed’s bond portfolio in a program known as Operation Twist. The stimulus measures are aimed at trying to bring down an unemployment rate that’s been stuck near 9 percent or above since April 2009.

Dudley said while recent economic reports have shown an improvement, that shouldn’t be a signal for the Fed to relax. Growth next year may be around 2.75 percent after somewhat more than 2.5 percent in the fourth quarter, he said.

“Although the latest news on the U.S. economy is somewhat more encouraging than that from earlier in the year, we should not take much solace from that,” he said. “The U.S. economy continues to face several obstacles,” including consumers cutting debt and caution by businesses.

“We also continue to face significant downside risks, mostly related to the stress in the eurozone,” Dudley said.

Fewer Americans than forecast filed first-time claims for unemployment insurance payments last week, an indication the labor market may be gaining traction.

Applications for jobless benefits decreased 5,000 in the week ended Nov. 12 to 388,000, the lowest level since April, Labor Department figures showed today in Washington. Economists forecast 395,000 claims, according to the median estimate in a Bloomberg News survey. The number of people on unemployment benefit rolls fell to a three-year low.

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