By Steven K. Beckner
(MNI) – With the U.S. economy facing domestic and external downside
risks, as well as “significant impediments,” monetary policy “will
continue to do its part” to stimulate growth, New York Federal Reserve
Bank President William Dudley said Friday.
Monetary policy is “not all-powerful” and needs help from
“complementary” housing and fiscal policies, said Dudley, who is vice
chairman of the Fed’s policymaking Federal Open Market Committee.
On a morning when the Commerce Department reported faster but still
slower than expected fourth quarter real GDP growth, Dudley said the
better pace is unlikely to be sustained in remarks prepared for delivery
at a regional economic press briefing in New York City
His gloomy comments on the economic outlook and his prognosis of
further disinflation seemed to suggest a willingness to maintain, if not
amplify, a very accommodative monetary policy stance two days after the
FOMC extended the expected period of near zero short-term interest rates
until at least the end of 2014.
He acknowledged improvements in manufacturing and in durable goods
purchases, but warned that increased auto sales are apt to prove
temporary. And he sounded particularly woeful about the depressed
housing market.
What’s more, he downplayed improvements in the labor market,
attributing much of the decline in the unemployment rate to discouraged
Americans dropping out of the labor market. Because of “significant
excess slack” in the economy, the inflation rate is likely to continue
falling, the former Goldman Sachs chief economist predicted.
Dudley echoed the FOMC’s Wednesday afternoon policy statement which
reaffirmed that the Fed will keep the funds rate in the zero to 25 basis
point range, where it has been for more than three years, and added 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 late 2014.”
The FOMC had previously said it expected the funds rate to stay
“exceptionally low” “through at least mid-2013.”
Dudley declined to go much beyond the FOMC statement, except to
say, “monetary policy has done and will continue to do its part in
supporting the recovery — but it is not all-powerful.”
“Other complementary policy actions in housing, fiscal policy and
structural adjustment or rebalancing of the economy will be essential if
we are to achieve the best available recovery,” he said.
Dudley also noted that the FOMC “released a statement of longer-run
goals and monetary policy strategy within the context of the dual
mandate, and published information on individual participants’
expectations of the appropriate future interest rate path.”
“As Chairman Bernanke explained in his press conference on
Wednesday, the strategy statement ‘should not be interpreted as
indicating any change in how the Federal Reserve conducts monetary
policy. Rather, its purpose is to increase the transparency and
predictability of policy,” he said.
Earlier, the Commerce Department estimated that GDP grew a real
2.8% in the further quarter, a full percent more than in the third
quarter, but below the median forecast. Other recent data have shown
strength in manufacturing and in durable goods spending. But Dudley was
not greatly impressed.
“Recent data suggest that the U.S. economy ended 2011 on a somewhat
stronger note — the best performance since the first half of 2010,” he
said. “Nonetheless, the amount of slack in the economy remains
substantial. Moreover, I think it is unlikely that the pace of growth we
saw in the fourth quarter will carry through to the first half of 2012.”
Dudley said he “expect(s) moderate growth in the year ahead and
see(s) the risks to that outlook as skewed to the downside, mainly due
to uncertainty as to how events in Europe will unfold.”
Noting that sales of light-weight motor vehicles reached the
highest quarterly rate since the first half of 2008 in the fourth
quarter, he called that “encouraging,” but quickly added that “this
boost is likely due in part to temporary factors.”
“Moreover, for goods and services other than durable goods, the
rate of growth of consumer spending has been rather tepid,”he said. “The
picture that emerges — up to now — is of a consumer who continues to
be cautious.”
Nor was Dudley inspired by the apparent labor market improvements,
notably the further drop in the unemployment rate to 8.5% in December,
compared to 9.1% as recently as August.
He noted that non-farm payroll growth averaged “just 140,000″ per
month in the fourth quarter, less than in the third, and attributed the
drop in unemployment in part to “an outright decline of the labor
force.”
“Workers aged 25 to 54 have been particularly prone to dropping
out, which suggests that the decline in the unemployment rate may
overstate the improvement in labor market conditions,” he said. “Despite
some improvements, the economy continues to operate with significant
excess slack.”
“Less than 59% of the U.S. working-age population has a job,”
Dudley observed. “This is unacceptably low — just about the same share
as in late 2009 and well below the levels in 2006 and 2007.”
He was a bit more upbeat about a pick-up in hours worked and in
average hourly earnings, saying they imply a “respectable” 5% rise in
private wage and salary income.
But inflation should be the least of the Fed’s concerns, Dudley
suggested.
The “large amount of slack is putting downward pressure on trend
inflation,” he said. “After a brief run-up during the second quarter of
2011 — reflecting the pass-through from higher commodity prices and
supply-chain disruptions– inflation has retreated and may be headed
down further.”
Bernanke Wednesday said a combination of below target inflation and
unemployment above what the FOMC perceives to be the “longer run”
projection might justify further Fed easing.
Dudley did not explicitly echo those sentiments, but he seemed to
suggest that such conditions may obtain in coming months.
“In addition to the temporary nature of some of the recent
improvement, there are significant impediments to a robust recovery,” he
said, going on to list three:
* “First, global financial and economic conditions may impede
faster growth. In particular, growth in the euro area is slowing and a
recession may be underway with adverse direct and indirect effects on
the U.S. economy.”
* “Second, fiscal policy has become more contractionary. Despite
the extension of the payroll tax cut, the stance of federal fiscal
policy has tightened and employment and spending by state and local
governments continues to decline.”
* “Third, despite record low mortgage interest rates, the depressed
housing market remains a significant impediment.”
Dudley put particular emphasis on the third impediment. “While
house prices are no longer overvalued by historical standards,
restrictions on access to credit and the large number of homes in the
foreclosure pipeline means that home prices remain under downward
pressure.”
He said “the ongoing weakness in housing makes achieving a vigorous
economic recovery more difficult for several reasons”:
* “The strong rebound in housing construction and related
activities, such as furniture sales, that typically power economic
recoveries following deep recessions is absent.”
* “The decline in home prices has eroded household wealth, which
then inhibits consumer spending. Since home values peaked in 2006,
homeowners have lost more than half their home equity and many expect
further declines.”
* “The weakness in home prices has reduced credit availability
because many households and small businesses use their homes as their
primary source of collateral for loans.”
* “The big drop in house prices has made it more difficult for
borrowers to refinance, undercutting some of monetary policy’s ability
to support demand.”
Dudley referred listeners to an earlier speech in which he
suggested various “policy interventions” the federal government could
take to boost housing, some of which were included in a Fed staff white
paper which Bernanke sent to Capitol Hill in early January.
** Market News International **
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