NEW YORK (MNI) – In remarks during a briefing on regional economic
conditions Monday, New York Federal Reserve Bank President William
Dudley said conditions are in place for such higher growth in 2011 and
2012. He warned, however, that “in order to reduce joblessness
significantly over the coming quarters, the economy needs to grow at a
considerably faster rate than we have seen so far in this recovery.”
Below is an excerpt from his remarks:
National Economic Conditions
To provide context, let me first comment on national economic
conditions. Since the Great Recession ended in 2009, the economy has
grown at a modest pace. When we last met, in October, the available data
showed that we hit a soft patch at mid-year. The recovery had slowed,
extending the time before employment and inflation could be expected to
return to levels consistent with the Federal Reserve’s dual mandate.
And, with the loss of economic momentum, downside risks had increased.
In order to foster greater economic momentum, reduce downside risks
and speed up the return to more normal levels of unemployment and
inflation, in early November the Federal Reserve announced its intention
to purchase $600 billion of Treasury securities. These purchases helped
to ease financial conditions, thereby stimulating economic activity.
More recently, we have seen signs of a pick-up in the pace of
growth, with activity in the second half of 2010 turning out to be
considerably stronger than most analysts expected. Real final sales grew
at a 4 percent annual rate over the second half of 2010, up from 1
percent over the first half, led by surprisingly strong growth of
consumer spending, continued strong growth of exports and slower but
still healthy growth of business fixed investment.
Several notable forces combined to encourage the resumption of
stronger growth. On the policy side, as I mentioned, the Federal Open
Market Committee provided further stimulus through purchasing Treasury
securities. This, plus the lagged effects of its previous measures,
helped to improve financial conditions. Also, the Board of Governors’
Senior Loan Officer Opinion Survey indicates that, while the absolute
level of lending standards remains tight, banks did begin to ease
standards somewhat in the second half of 2010.
The pick-up in the economy has occurred despite renewed weakness in
the housing market. Home prices have softened anew and construction
activity remains stuck at a very low level, likely reflecting the
continued large supply of unsold homes. We believe that it will take
more time, perhaps as much as another year, for enough of these homes to
be bought that residential construction might begin a meaningful
On the labor front, the most recent employment report for January
2011 is quite difficult to interpret. Only 36,000 nonfarm payroll jobs
were added, well below expectations. Yet, we get a very different
perspective from the unemployment rate, which fell by 0.4 percentage
points for the second month in a row and now stands at 9.0 percent. Job
growth was undoubtedly held down by the severe winter storms that
affected many major cities, including our own. The decline in the
jobless rate was not an unmitigated positive, as a significant part of
this decline was due to fewer people looking for work.
Thus, neither the disappointingly slow job growth nor the welcome
steep drop in unemployment seems to paint the full picture. The truth
lies somewhere in between. Despite the stronger job growth that we
expect in the months ahead, we will continue to have a substantial
amount of slack in our labor markets that will take time to absorb.
At this point, while the soft patch is over and the risk of a
double dip has subsided, the economy still faces headwinds as a result
of the aftermath of the financial crisis, the housing bust and the high
level of unemployment that still prevails. As banks and other financial
institutions seek to strengthen their balance sheets and avoid future
credit losses, they may keep credit conditions tighter than normal. In
addition, many consumers’ borrowing options may be limited by their
impaired credit histories, and the recovery is not getting the strong
boost from home construction that most previous recoveries have
benefited from. Furthermore, as I will discuss later, households are
still feeling the financial impact of lost wealth and jobs, which makes
some cautious about spending and investing.
The economy is healthier, but it is not yet well. In order to
reduce joblessness significantly over the coming quarters, the economy
needs to grow at a considerably faster rate than we have seen so far in
I am happy to say that we believe that conditions are in place for
such higher growth in 2011 and 2012. We entered this year with a fair
amount of momentum. Business and household spending has strengthened,
presumably reflecting greater confidence in the economic outlook and
progress in the repair of household balance sheets. Businesses are
expanding their investments in equipment and software at a healthy pace.
And, their spending on nonresidential structures, such as office and
factory space is no longer contracting as sharply as it was a year ago.
Further support comes from the agreement by Congress and the
administration to postpone some tax increases, to reduce payroll taxes
temporarily and to extend unemployment benefits. In addition, our
exports continue to expand, supported by strength in demand abroad,
particularly in Asia.
Higher growth, a steady reduction in spare capacity in the economy
and continued stability in inflation expectations should also slowly
begin to reverse the recent decline in core inflation. Inflation was
quite low during the second half of 2010, but we expect that to be the
low point of the cycle.
In short, viewed through the lens of the Federal Reserve’s dual
mandatethe pursuit of the highest level of employment consistent with
price stabilitythe current situation remains unsatisfactory. However,
we appear now to be moving in the right direction.
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