Federal Reserve Bank of New York President William Dudley said the outlook for U.S. job growth and inflation is “unacceptable” and that more monetary easing is probably needed to spur growth and avert deflation.
“We have tools that can provide additional stimulus at costs that do not appear to be prohibitive,” Dudley, who serves as vice chairman of the Fed’s policy-setting Open Market Committee, said today in a speech to business journalists in New York. “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.”
Dudley’s remarks are one of the clearest signs that policy makers will start a second round of unconventional monetary easing as soon as the FOMC’s next meeting Nov. 2-3. While other Fed officials voiced a range of views in speeches this week, Chairman Ben S. Bernanke said yesterday that the central bank has a duty to aid the U.S. economy as the jobless rate holds near 10 percent.
Lowering long-term interest rates by restarting purchases of Treasuries or mortgage debt would have a “significant” effect on the economy by supporting the value of homes and stocks, making housing and refinancing mortgages more affordable and reducing the cost of capital for businesses, Dudley, 57, said to a Society of American Business Editors and Writers conference.
“Both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable,” Dudley said. “The longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.”
Responding to questions afterward, Dudley said he’s not concerned the U.S. will relapse into recession and that he’s expecting the current 2 percent growth to “gradually accelerate.”
“What I’m less confident about is how fast we’re going to get back to our objectives” of price stability and full employment, he said.
Treasuries declined after reports showed U.S. consumer spending rose more than forecast in August and manufacturing in China expanded at the fastest pace in four months in September. The yield on 10-year Treasury note rose to 2.56 percent at 9:28 a.m. in New York from 2.51 percent yesterday.
The risk that inflation expectations rise because of asset purchases can be countered by a “credible” plan from the Fed to exit the unprecedented stimulus with tools such as term deposit accounts, Dudley said. Also, “there is nothing to worry about” on expanding Fed exposure to higher short-term rates, he said.
Dudley said that $500 billion of purchases, for example, would add as much stimulus as reducing the Fed’s benchmark rate 0.5 percentage point to 0.75 percentage point, depending on how long investors expect the Fed to hold the assets.
“The clearer and more credible the framework governing purchases, the greater the likelihood that market participants would act in a manner that helped the Fed achieve its objectives,” Dudley said. Investor confidence in the Fed’s ability to exit “when the time is right” will make purchases more effective in stimulating the economy, he said.
Dudley said in response to questions that the ability “for us to exit on time” and without leading to a longer-term inflation problem is “critical.”
Another option is for the Fed to announce an explicit inflation goal and then, if price increases are too slow, potentially aim to overshoot the goal in future years. One risk is that investors may “mistakenly” conclude that the Fed was “tinkering with its long-run inflation objective,” undermining the change in policy.
Dudley’s comments differ from the FOMC’s Sept. 21 statement that it’s prepared to ease policy “if needed” to spur growth and achieve its mandate of stable prices and full employment.
Misaligned With Mandate
The jobless rate has been above 9 percent since the worst recession since the Great Depression ended in June 2009. Inflation measures are “somewhat below” levels the FOMC judges consistent with its mandate, the Fed panel said in its statement last month.
Dudley declined to comment on what he’ll advocate at the next meeting or to predict its outcome. Some policy makers may not be on board: Philadelphia Fed President Charles Plosser said Sept. 29 that he doesn’t see how additional asset purchases will help employment in the near term, while Dennis Lockhart of the Atlanta Fed said Sept. 28 that he hadn’t made up his mind yet on easing policy.
Figures from the Commerce Department in Washington showed yesterday that the U.S. economy grew at a 1.7 percent annual rate in the second quarter, marking the start of the slowdown in growth that’s concerned the central bank. The world’s largest economy grew 3.7 percent in the first three months of the year and 5 percent at the end of 2009.
Economists surveyed last month projected little pickup in growth for the rest of the year as joblessness hobbles consumer spending and housing languishes around record lows.
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