By Brai Odion-Esene and Sheila Mullan

FLORHAM PARK, N.J.(MNI) – New York Federal Reserve Bank President
William Dudley Tuesday said a substantial boost in labor market
conditions between now and the end of the year will a key factor in
determining whether the Fed should continue buying long-term government
securities after the current program ends in December.

In remarks prepared for the Morris County Chamber of Commerce,
Dudley was downbeat in his near-term assessment of economic conditions,
but vowed the Fed will “stay the course” and predicted that — supported
by exceptionally low interest rates — growth should gradually pick up.

The Fed’s policymaking Federal Open Market Committee announced last
week that in addition to its maturity extension program, it will buy $40
billion in mortgage-backed securities a month until it sees a
significant improvement in the labor market. It also pushed out its
forward guidance — how long its expects interest rates to remain close
to zero — to mid-2015 from late-2014.

The $267 billion maturity extension program, also know as
‘Operation Twist,’ will end in December and Dudley said he would “be
taking stock on how we are doing with respect to our employment and
inflation goals and whether it will be appropriate to continue
purchasing longer-dated Treasuries when that program concludes.”

“I think that this will depend on whether we have seen a
substantial improvement in the labor market outlook in the interim and
any further evidence about the costs and benefits of continuing such
purchases,” he added.

In its statement announcing the additional quantitative easing
measures, the FOMC did not set an end-date, indicating that it would
continue so long as the outlook for the labor market does not improve

“So what does ‘substantial improvement in the outlook for the labor
market’ mean to me?” Dudley said. “Note that I will be focusing on the
outlook, not just the current state of labor market conditions.”

“In that context, it wouldn’t be enough for me just to see the
unemployment rate decline a bit. It would also matter why the
unemployment rate is declining and whether that improvement is likely to
be sustained in the future,” he added.

Dudley said that in order to measure the level of improvement in
the outlook for the labor market, he will be looking at a range of
indicators, including the unemployment rate, payrolls date, the labor
participation rate, the employment-to-population ratio and job finding
rates as well as the growth momentum within the economy.

As for the additional actions unveiled by the Fed last week, Dudley
backed the central bank’s move, arguing that if the Fed had not eased
policy further, the pace of growth would have been “unacceptably slow.”

Now, however, “I anticipate that the pace of economic growth will
gradually pickup, supported by very low rates,” he said.

Dudley defended the Fed’s decision as being fully consistent with
its dual mandate, and said he is confident that the costs are

He cited the boost to confidence in the medium-term outlook that
should result from the Fed’s actions, adding, “I believe that a nudge
in the right direction will move us closer to a self-reinforcing cycle
of more hiring, more spending, more growth, and more investment.”

Dudley was less positive in his views on the current state of the
economy, and referred to the near-term outlook for the business sector
as “particularly worrisome right now.”

The 8.1% national unemployment rate is an “unacceptably high”
level, he said, and projected that the growth pace is likley to remain
disappointing in the near term.

“We aren’t yet growing fast enough to put back to work many of the
idle workers and business facilities that represent the productive
potential of our economy,” Dudley said.

He pointed to still-impaired access to credit, the fiscal drag and
uncertainty in the U.S., risks from Europe, as well as ongoing
balance-sheet repair as the main factors hindering growth.

On the inflation front, Dudley predicted that while higher energy
and grain prices will cause headline inflation to edge “somewhat higher
for a few months,” it will then move slightly lower again.

“We will stay the course,” Dudley vowed. “We are setting policy to
achieve a stronger recovery in the context of price stability.”

“When that finally materializes, I’ll view it as consistent with
the result we are trying to achieve, and not a reason to pull back our
policies prematurely,” he added.

** MNI Washington Bureau: 202-371-2121 **