Federal Reserve Bank of New York President William C. Dudley said the central bank may prolong its asset-purchase program if the economy’s performance fails to meet the Fed’s forecasts.
“If labor market conditions and the economy’s growth momentum were to be less favorable than in the FOMC’s outlook -- and this is what has happened in recent years -- I would expect that the asset purchases would continue at a higher pace for longer,” Dudley said in remarks prepared for delivery today in New York. He serves as vice chairman of the Federal Open Market Committee and has never dissented from a monetary policy decision.
Dudley also said any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” The economy may also diverge from the Fed’s forecasts, he said.
Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note to as high as 2.61% this week from as low as 1.63% in May. Dudley joined other Fed policy makers this week in seeking to damp expectations that an increase in the benchmark interest rate will come sooner than previously forecast.
“Let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants,” said Dudley, 60, a former chief U.S. economist for Goldman Sachs Group Inc.
Stocks Rise
Stocks extended gains after Dudley’s comments, with the Standard & Poor’s 500 Index climbing 1% to 1,619.80 at 10:41 a.m. in New York. The yield on the 10-year Treasury note fell to 2.51% from 2.54% late yesterday.
Reports today showed that consumer spending rebounded in May following the largest drop in more than three years, first- time claims for unemployment benefits fell last week and a gauge of consumer confidence climbed to the highest level since January 2008.
Dudley repeated Fed Chairman Ben S. Bernanke’s plan for a reduction in the pace of bond purchases should the economy perform as the Fed expects. He said the Fed may start to pare the current $85 billion monthly pace later this year and end the program around mid-2014.
Dudley spoke a day after a Commerce Department report showed first-quarter growth in the U.S. was less than forecast as a payroll tax increase reduced consumer spending.
Tug-of-War
“I continue to see the economy as being in a tug-of-war between fiscal drag and underlying fundamental improvement, with a great deal of uncertainty over which force will prevail in the near-term,” Dudley said.
A report next week from the Labor Department is forecast to show that the unemployment rate fell to 7.5% this month from 7.6%, according to a Bloomberg survey of economists. Employers probably added 165,000 workers to payrolls, down from 175,000 the prior month. The jobless rate peaked at 10% in October 2009.
Much of the decline in the jobless rate, Dudley said, is a result of workers leaving the labor force. “Job loss rates have fallen, but hiring rates remain depressed at low levels,” he said. “The labor market still cannot be regarded as healthy.”
The FOMC has said it will keep its benchmark rate close to zero as long as unemployment remains higher than 6.5% and the outlook for inflation is no more than 2.5%.
Inflation Goal
“Not only will it likely take considerable time to reach the FOMC’s 6.5% unemployment rate threshold, but also the FOMC could wait considerably longer before raising short-term rates,” he said. “The fact that inflation is coming in well below the FOMC’s 2% objective is relevant here. Most FOMC participants currently do not expect short-term rates to begin to rise until 2015.”
The timeline Bernanke laid out for tapering bond purchases was predicated on the economy growing in line with the FOMC’s forecasts. Central bankers expect growth of 2.3% to 2.6% this year, according to projections released last week. The economy grew at a 1.8% rate from January through March, down from a prior reading of 2.4%.
For the Fed’s outlook to be realized, gross domestic product would have to expand at about a 3.3% average annual rate in the last six months of 2013, according to calculations by economists at BNP Paribas SA in New York.
Stimulus Continuing
Officials speaking after Bernanke’s June 19 press conference have emphasized that the Fed will continue to provide stimulus to the economy even after the bond-buying program ends.
“This asset-purchase tapering is just slowing the rate at which we’re increasing the balance sheet,” Richmond Fed President Jeffrey Lacker, who doesn’t vote on the FOMC this year, said yesterday in a Bloomberg Television interview. “We’re not anywhere near decreasing the balance sheet yet.”
“What we’re talking about here is dialing back,” Richard Fisher, president of the Dallas Fed, said in London on June 24. “The word ‘exit’ is not appropriate here,” said Fisher, who doesn’t vote on policy this year and has been critical of the Fed’s easing policies.
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