Tags: Fed | Dudley | Economic | Growth

Fed’s Dudley Cuts His Expectations for U.S. Economic Growth

Friday, 12 August 2011 12:24 PM

Federal Reserve Bank of New York President William C. Dudley said policy makers gave a “sober assessment” of the U.S. economy this week and that he cut his forecast for growth.

“Economic growth so far in 2011 has been quite a bit slower than we expected earlier in the year,” Dudley, 58, said today at the bank’s New York headquarters. “In the last few months conditions in the labor market have deteriorated again and the unemployment rate edged up. Household spending has flattened out, and the housing sector is depressed.”

The policy-setting Federal Open Market Committee this week pledged to keep its benchmark interest rate near zero until at least mid-2013 to revive an economic recovery that’s “considerably slower” than anticipated. Fed officials also “discussed the range of policy tools” available to boost growth and are “prepared to employ those tools as appropriate,” the FOMC said.

“Following the release of the FOMC’s statement, market interest rates generally moved lower, which should help provide some additional support for economic activity and jobs,” Dudley said. “I would note, however, that conditions remain unsettled and the equity market in particular remains very volatile.”

The Fed made the rate pledge after Standard & Poor’s downgraded the U.S. government’s credit rating and Europe’s debt crisis worsened, roiling markets worldwide. The S&P 500 Index of stocks fell 18 percent from a three year high on April 29 through Aug. 8. The index increased 0.5 percent to 1,178.01 at 10:16 a.m. in New York trading.

Downgrades Forecast

Dudley said that he has downgraded his forecast while still expecting to see “stronger growth” in the second half of the year because “some of the weakness” in the first six months was due to “temporary factors” like higher commodity prices and supply chain disruptions caused by the earthquake in Japan.

“But it is clear that not all of the weakness was due to these one-time factors -- and in light of this, I have revised down my expectations for the pace of recovery going forward,” Dudley said. He didn’t quantify how much he’s cut his forecast.

Growth slowed to a 1.6 percent rate during the second quarter from a year earlier. About 70 percent of the time when the pace has fallen below 2 percent, a contraction has followed within a year, according to data since World War II in an April study by Jeremy Nalewaik, a Fed board staff economist.

Chairman Ben S. Bernanke signaled he wouldn’t let dissent from three policy makers over the rate commitment -- the most opposition to a FOMC decision in 18 years -- stop him from expanding record monetary stimulus. Dudley, vice chairman of the FOMC, voted with Bernanke.

Third Round

While the FOMC didn’t specify which tools it’s considering using, Bernanke said in July that if the recovery weakens the Fed may weigh beginning a third round of bond purchases or pledge to keep its balance sheet at a record high for a longer period of time. The Fed purchased $1.7 trillion of Treasury and mortgage debt from December 2008 to March 2010 and another $600 billion of Treasuries from November through June.

Dudley said growth in the New York Fed’s district “though somewhat stronger than at the national level, has nonetheless been disappointing.”

Employment growth in the region has been hurt by government cutbacks, and “another potentially troubling development” are job losses in the financial industry, Dudley said.

“It is difficult to say when the pace of job growth will pick up,” Dudley said. Jobs are being added in industries like health care and education, and some industries are hiring to replace earlier layoffs, such as administrative support, he said.

New York City’s securities industry has lost nearly 4,000 jobs since April, Dudley said. “More difficulties may lie ahead” in the industry, he said, noting “recent announcements of consolidations and layoffs.”

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Federal Reserve Bank of New York PresidentWilliam C. Dudley said policy makers gave a sober assessment of the U.S. economy this week and that he cut his forecast for growth. Economic growth so far in 2011 has been quite a bit slower than we expected earlier in the year,...
Friday, 12 August 2011 12:24 PM
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