Fed’s Dudley: Too soon to say economy out of danger
SYRACUSE (New York), April 12 — The disappointing performance of the US labour market in March shows it is too early to conclude the economy is out of the woods, despite months of encouraging economic data, New York Federal Reserve Bank president William Dudley said today.
The Fed is gathering more data to determine whether last month’s non-farm payrolls report, which showed the economy added fewer jobs than expected, was just a weather-related setback or a sign the recovery is losing momentum again, Dudley said.
An influential voting member of the US central bank‘s monetary policy committee, Dudley left the door open to additional stimulus measures if the economic recovery gets off track.
“QE3 is all about cost and benefits,” Dudley said in response to a question from a small audience at the Center for Economic Development in Syracuse. “If the economic outlook were to worsen... then the benefits of doing more (QE) would increase.”
He also cited the example of Japan‘s stagnant economy as a cautionary tale against removing monetary stimulus too quickly.
“We currently anticipate interest rates will be exceptionally low at least until late 2014. I don’t see any information that suggests the need to change that.”
Earlier, during a speech to the same audience, Dudley noted that the economic data also “looked brighter at this point in 2010 and again in 2011, only to fade later in those years.”
Signs that the economic recovery was losing steam have encouraged the Federal Reserve to launch in the past few years two rounds of monetary stimulus measures known as quantitative easing. Bets on a third round have again increased following the latest jobs report.
“The somewhat softer March labor market report that was released last Friday may reflect the earlier positive influence of the mild weather on job creation in January and February, although other less sanguine interpretations are also plausible,” Dudley said in prepared remarks to be delivered at a conference in Syracuse, New York.
Yesterday, the Fed’s vice chair Janet Yellen said further monetary easing could be warranted if the economy proceeds at a slower-than-expected pace.
Growing at potential
Regardless of possible weather-related effects, economic activity is still not expanding quickly enough to reduce the slack in the economy, Dudley stressed. He estimated US gross domestic product will grow at an annual rate of 2.25 per cent during the first quarter.
That is around the growth rate that economists believe to be sustainable for the US economy in the long run, also known as the potential growth rate.
“We need sustained growth above that rate to absorb the still substantial amount of unused productive capacity,” Dudley said. “Our recent growth rates are barely keeping up with our potential.”
And, to blur the growth outlook even further, headwinds and downside risks to the economy abound in the next few months, Dudley warned.
“In the headwinds department, I would include the run-up in gasoline prices because that will sap purchasing power, the continued impediments to a strong recovery from ongoing weakness in the housing sector, and fiscal drag at the federal and state and local levels.”
Downside risks, he added, include the possibility of disappointing economic growth overseas and higher oil prices.
Dudley called for a great bargain in Washington to solve the nation’s fiscal problems before it becomes too late.
“Market participants are essentially giving us a hall pass through the election. But that hall pass will expire later this year, early next year,” he warned, referring to the possibility that investors will demand higher yields to hold US government debt if fiscal prospects do not improve.
If no budget agreement is reached, Dudley said, the economy will suffer a negative impact of about 3 per cent of GDP at the beginning of 2013, after the expiration of several economic stimulus policies such as the Bush-era tax cuts, payroll tax cuts and unemployment benefits.
“This will be pretty calamitous for the economy,” he said.
He noted that the US fiscal position is worse than what it seems to be if more normalised interest rates are factored in, and made clear the Fed will not hold rates lower to keep a lid on the country’s debt service.
“The Federal Reserve is going to do what it has to do on interest rates to follow the monetary policy that is appropriate to achieve its dual mandate,” he said.
“If this causes fiscal issues, too bad. We’re not going to keep interest rates low to essentially solve the fiscal problem.” — Reuters