Federal Reserve Bank of New York President William C. Dudley said the U.S. economy will probably slow this year while confronting risks “skewed to the downside.”
“It is unlikely that the faster growth experienced in the fourth quarter of 2011 will be matched in the first half of 2012,” Dudley said today in the prepared text of remarks in New York. “In addition to the temporary nature of some of the recent improvement, there are significant impediments to a robust recovery.”
The policy-setting Federal Open Market Committee this week voted to extend its pledge to keep interest rates low until at least late 2014, compared with a previous date of mid-2013. Chairman Ben S. Bernanke said on Jan. 25 that the Fed is weighing additional stimulus to bring down the 8.5 percent unemployment rate, including another round of bond buying.
The economy expanded less than forecast in the fourth quarter as consumers curbed spending and government agencies cut back. Gross domestic product, the value of all goods and services produced, climbed at a 2.8 percent annual pace following a 1.8 percent gain in the prior quarter, Commerce Department figures showed today in Washington.
“Monetary policy has done and will continue to do its part in supporting the recovery -- but it is not all-powerful,” Dudley said. “Other complementary policy actions in housing, fiscal policy and structural adjustment or rebalancing of the economy will be essential if we are to achieve the best available recovery.”
Primary Risk
Dudley said the main risk to growth is “uncertainty as to how events in Europe will unfold.” Also, “more contractionary” fiscal policies and the “depressed housing market” are likely to impede economic expansion, he said.
“The ongoing weakness in housing makes achieving a vigorous economic recovery more difficult for several reasons,” including the resulting damage to consumer wealth, he said. “The big drop in house prices has made it more difficult for borrowers to refinance, undercutting some of monetary policy’s ability to support demand.”
Dudley in a Jan. 6 speech called on the government to remove obstacles to refinancing, suggesting that Fannie Mae and Freddie Mac reduce the principal of the loans they guarantee. Republican Senator Bob Corker of Tennessee called Dudley’s suggestion “absolutely egregious.”
While “recent data suggest that the U.S. economy ended 2011 on a somewhat stronger note,” the “amount of slack in the economy remains substantial,” Dudley said.
Improved Conditions
An “outright decline of the labor force” means that the “decline in the unemployment rate may overstate the improvement in labor market conditions,” Dudley said. Joblessness fell to 8.5 percent in December, the lowest in almost three years.
“This large amount of slack is putting downward pressure on trend inflation,” Dudley said. “Inflation has retreated and may be headed down further.”
The Fed this week set a long-term goal of 2 percent inflation, and forecast that price increases will fall short of that target this year and next. The personal consumption expenditures price index climbed 2.5 percent for the 12 months ending in November.
Inflation will range from 1.4 percent to 1.8 percent this year, and from 1.4 percent to 2 percent in 2013, Fed officials predicted. In November, they projected inflation of 1.4 percent to 2 percent in 2012, and 1.5 percent to 2 percent next year.
“The pace of recovery remains sluggish by historical standards and is likely to slow somewhat in early 2012,” Dudley said. “Thus, unemployment, both nationally and locally, is likely to remain unacceptably high for some time. Also, inflation is likely to be below our objective for several years.”
© Copyright 2012 Bloomberg News. All rights reserved.