NEW YORK (MNI) – The following is an excerpt from New York Federal
Reserve Bank President William Dudley’s remarks Friday morning to a
Society of American Business Editors and Writers gathering:

It is true that the larger the size of the balance sheet, the more
likely it is that the Fed would ultimately sell assets back into the
market, potentially at prices that could result in losses.

Although some fear that such losses could compromise the Federal
Reserves independence, there is no reason why this should be the case,
providing we stick closely to our mandate at all times. To date, the
Feds actions in responding to the crisis have resulted in abnormally
large profits that might reasonably be set against any subsequent
losses. But much more importantly, our dual mandate does not state that
we should do what is necessary to promote full employment and price
stability only at times when we are virtually certain that in doing so
we will make a profit. It directs us to promote full employment and
price stability at all times. Profits and losses in any given year are
much less important than getting the U.S. economy back to the highest
level of employment consistent with price stability. In making our
assessments about next steps, we need to be a bit humble about our
capacity to forecast how market participants would respond to our
actions. We do not control their behavior nor have much historical
experience that we can draw on to easily assess how they are likely to
behave. Even viewpoints that turned out to be incorrect could persist
for a long time and generate adverse consequences. It is not enough for
us to be right in theory. We also have to be convincing in practice and
in explaining why concerns we think are misplaced are indeed
unwarranted. As Chairman Bernanke indicated at Jackson Hole, the FOMCs
decision with respect to providing additional accommodation will be made
by weighing the costs against the benefits. This is a dynamic process,
which depends on the evolution of the economic outlook and our own
ability to learn how to become more effective in improving the
cost/benefit trade-offs. And, at its last meeting in September, the FOMC
said it is prepared to provide additional accommodation if needed to
support the economic recovery and to return inflation, over time, to
levels consistent with its mandate.

Currently, my assessment is that both the current levels of
unemployment and inflation and the timeframe over which they are likely
to return to levels consistent with our mandate are unacceptable. In
addition, the longer this situation prevails and the U.S. economy is
stuck with the current level of slack and disinflationary pressure, the
greater the likelihood that a further shock could push us still further
from our dual mandate objectives and closer to outright deflation. We
have tools that can provide additional stimulus at costs that do not
appear to be prohibitive. Thus, I conclude that further action is likely
to be warranted unless the economic outlook evolves in a way that makes
me more confident that we will see better outcomes for both employment
and inflation before too long.

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