By Steven K. Beckner

(MNI) – New York Federal Reserve Bank President William Dudley said
Thursday night that the Fed has already “done a lot” to stimulate the
economy, but he reiterated that Fed officials will “evaluate” whether
more monetary easing is needed.

Dudley, the vice chairman of the Fed’s policymaking Federal Open
Market Committee, said the FOMC could do more to boost the economy
either through clearer communication of how long it will keep the
federal funds rate near zero and/or through further balance sheet
expansion.

If the FOMC decides on a third round of large-scale asset purchases
or quantitative easing, it should look at buying more mortgage-backed
securities, he said in a televised interview on PBS’s “Nightly Business
Report.”

Dudley expressed concern about the European debt crisis and said a
worsening of the situation could impede credit flows and damage the U.S.
economy, even though U.S. banks’ direct exposure to European sovereign
debt is “quite modest.”

In a vote of confidence on the survival of the European single
currency, he asserted, “Oh, I absolutely think the Euro survives.”

Dudley seemed at least as concerned about the United States’ own
fiscal problems and urged that the Congressional Super Committee reach
an agreement that avoids a sequestration of spending and an “abrupt
shift” to “restrictive” fiscal policy next year.

Dudley’s comments on monetary policy resembled those he gave
earlier Thursday in a speech at West Point.

“Well, we’ve done a lot,” he said when asked what more the Fed
could do, but said it “could” do more.

“I think that on the communications side … we could probably make
more further progress in terms of explaining exactly what it would take
for us to actually start to want to raise short term interest rates.
You know, what level of unemployment, what level of inflation might be
thresholds where until we reach those thresholds we’d be pretty
comfortable keeping short term rates where they are.”

“The second thing we could is we could obviously do more on the
balance sheet side,” he said. “And I think that if we were to go down
that path, one obvious area to consider would be to do more in terms of
purchasing mortgage backed securities because to the extent that we
expand our balance sheet on that dimension, we directly help the housing
sector.”

Dudley said the FOMC “need to think about the cost and benefits”
and then “we have to decide, given that state of the economy, given the
outlook, do the benefits of further action outweigh the costs, or not.”

Later in the program, Dudley said, “we’re going to
continue to evaluate whether there are other steps we can take.”

He said a changed communication strategy and further balance sheet
expansion are “two things that (are) … very much on the table.”

First, “can we continue to refine our communication strategy to be
clearer to people in terms of how we are going to react to incoming
information,” he said, “and by providing greater clarity there, give
people more confidence.”

“And the second thing, of course, is that we will continue to
evaluate whether further expansion of our balance sheet would be helpful
in supporting economic conditions.”

Dudley contended that past quantitative easing has worked by
“helping support the stock market and housing values, and yes, the
economy.” While the Fed “wish(es) the economy were stronger than it’s
been,” he said “But we’re pretty convinced that the economy would have
been significantly worse if we hadn’t engaged in these programs.”

Unlike Chicago Fed President Charles Evans, who has proposed
holding the funds rate near zero until unemployment falls below 7%
and/or inflation rises above 3%, Dudley declined to give specific
numerical triggers.

But he said “the general framework I think is something that we
definitely want to explore.”

Dudley conceded it won’t be easy to reach agreement on the FOMC.
“Of course the devil is in the details to get all the members of the
committee to agree on what those right numbers are: what’s the right
unemployment rate, what’s the right inflation rate.”

“This is something that I definitely want to continue to work on
and see if we can bring the Committee to a consensus,” he said later.
“The problem here, of course, is it’s very hard to specify with just a
couple numbers, you know, what the conditions are for when you’d
actually think is the appropriate time to raise short term interest
rates.”

At the Aug. 9 meeting the FOMC stopped saying it expected to keep
the funds rate “exceptionally low … for an extended period” and
instead declared that it “currently anticipates that economic
conditions–including low rates of resource utilization and a subdued
outlook for inflation over the medium run–are likely to warrant
exceptionally low levels for the federal funds rate at least through
mid-2013.”

Dudley indicated he is not happy with that formulation.

“Right now we have this mid-2013 date,” he said. “That’s what we’ve
said. But you know, what’s that date based on? And so I think it’d be
helpful if we could provide little bit more detail about, well, what was
the underlying thinking that caused us to arrive at that particular
date.

Dudley said the FOMC adopted the mid-2013 language because it
realized that the “extended period” phraseology was “a little bit empty
because…the market perceived it as only lasting … as short as
several months, to as long as whatever.”

“And we thought that it would be better to make it clear to market
participants that extended period actually lasted quite a long time,” he
continued. “So when we did that it was in the middle of this year. So
we’re saying extended period is two years or more. And we thought that
would be helpful and provide greater clarity to the market.”

The FOMC arrived at mid-2013 “because I think it was the sense of
the committee that we were unlikely to reach an unemployment rate and
inflation rate that would cause us to want to exit sooner than that,” he
explained. “So implicit behind the number was some notion that the
economy was unlikely to be strong enough to generate an unemployment
rate low enough or inflation rate high enough that would cause us to
want to leave sooner.”

Dudley suggested that forward guidance language that was based on
economic conditions rather than a calendar date would be a great
improvement.

“I think the important thing it allows people, investors to have
more certainty about how the Federal Reserve is going actually behave in
the future, is likely to behave in the future,” he said. “And if people
have more confidence in how the Fed is likely to react to future
incoming economic information, that reduces the riskiness of them going
out and buying financial assets.”

“So it reduces risk premiums which supports the economy,” he added

** Market News International **

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