Federal Reserve Bank of New York President William C. Dudley said budget battles in Washington are among the risks to the outlook and he wants to see more momentum in the economy before paring the pace of the central bank’s bond buying.
“Congress will be considering how to fund the government for the next fiscal year and will also be debating what to do about the debt limit,” Dudley said in the text of remarks in Syracuse, New York. “This creates uncertainty about the fiscal outlook and may exert a restraining influence on household and business spending.”
The Fed last week unexpectedly held off on reducing its $85 billion monthly pace of asset purchases, saying it needs more evidence of lasting improvement in the economy. Chairman Ben S. Bernanke said on Sept. 18 after the two-day meeting the central bank must determine policy based on “what’s needed for the economy,” even if it surprises investors.
“I’d like to see economic news that makes me more confident that we will see continued improvement in the labor market,” Dudley, who holds a permanent vote on policy as vice chairman of the Federal Open Market Committee, said. “Then I would feel comfortable that the time had come to cut the pace of asset purchases.”
Fed officials last week reduced their growth estimates for this year and next. Gross domestic product will probably rise 2 percent to 2.3 percent this year, down from a June projection of 2.3 percent to 2.6 percent, according to their estimates.
“Consistent with the modest pace of economic growth, improvement in labor market conditions has been slow,” Dudley said. “Taken together, the labor market still cannot be regarded as healthy. Numerous indicators, including the behavior of labor compensation, are all consistent with the view that there remains a great deal of slack in labor markets.”
Employment growth has improved with the Fed’s bond purchases, which have expanded its balance sheet to a record $3.73 trillion. The U.S. has added an average of 160,000 jobs over the past six months, up from 97,000 originally reported for the half-year before the Fed decided to start the third round of purchases a year ago. Policy makers will get another jobs report before their next gathering on Oct. 29-30.
Dudley said in a Sept. 23 speech that policy makers must “forcefully” push against economic headwinds as growth hasn’t shown “any meaningful pickup” in momentum.
“The economy still needs the support of a very accommodative monetary policy,” Dudley said in his speech in New York. “Improving economic fundamentals versus fiscal drag and somewhat tighter financial conditions are pulling the economy in opposite directions, roughly canceling each other.”
Dudley, 60, reiterated his concern voiced Sept. 23 that fiscal restraint and interest rates that have climbed since May pose a risk to the economic outlook.
“We have seen a sharp drop in refinancing mortgage applications, a more moderate but significant decline in purchase mortgage applications and fairly flat housing starts and new home sales,” Dudley said. “These developments do suggest that higher mortgage rates have cut into the upward momentum of the housing sector.”
Dudley said in an interview with CNBC that aired Sept. 24 that the central bank may still slow the pace of purchases in 2013 depending on the economy’s performance.
“If the economy were behaving in a way aligned with the Fed’s June forecast, then it’s certainly likely that the Fed would begin to taper later this year,” Dudley told CNBC. “I certainly wouldn’t want to rule it out. But it depends on the data.”
Dudley was chief U.S. economist for Goldman Sachs Group Inc. from 1996 to 2005 before joining the Fed regional bank in 2007. He served as the New York Fed’s head of markets before becoming president in 2009, succeeding Timothy F. Geithner when he became Treasury secretary. Dudley holds an economics doctorate from the University of California at Berkeley.
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