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Fed’s Dudley: ‘Moderate’ Economic Recovery Lags Goals

Thursday, 19 May 2011 02:09 PM

Federal Reserve Bank of New York President William Dudley said the central bank is falling short of its goals because of the modest pace of the recovery, with unemployment too high and headline inflation likely to ease.

“The recovery remains moderate and we still have a considerable way to go to meet the Fed’s dual mandate of full employment and price stability,” Dudley said today in a speech in New Paltz, New York.

Fed officials are considering how quickly to begin an exit from record stimulus after purchasing a total of $600 billion in U.S. Treasuries by the end of June. They are also discussing a strategy for how to remove stimulus, with a majority favoring ending the policy of reinvesting proceeds from maturing securities first before raising interest rates or selling assets, minutes of their April 26-27 meeting showed yesterday.

Inflation of more than 3 percent is “somewhat above the desired level” and has been pushed higher by rising commodities prices, Dudley said during a two-day tour of the Hudson River Valley. “It is noteworthy, however, that even with the sharp rise in oil and food prices over the past year -- and notwithstanding the more recent drops -- there has been limited pass-through into the prices of other goods and services.”

Gauges of core inflation, excluding food and energy, “remain below levels consistent with our mandate for price stability,” he said. If commodities prices stabilize or fall, “I would expect headline inflation to move back to a more mandate-consistent rate.”

Still Stable

Measures of the public’s view of inflation “remain stable,” Dudley said, adding “it is critical that we ensure that inflation expectations do not become unmoored.”

In response to audience questions, Dudley said the Fed has had a “difficult” time in promoting employment growth and that while the central bank’s bond purchase program was not “a panacea,” it has had a positive impact on jobs.

Dudley said he is confident the Fed will achieve price stability even in the face of a rising federal deficit.

“Regardless of what happens in Washington, we are going to do our job” and keep inflation in check, he said.

Fed Chairman Ben S. Bernanke and other policy makers last month reduced their forecasts for U.S. growth this year after the economy slowed in the first quarter, while increasing estimates for inflation excluding food and energy prices.

The consumer-price index increased 3.2 percent in the 12 months ended April, the biggest year-over-year gain since October 2008, figures from the Labor Department showed May 13. The index excluding food and energy rose 1.3 percent from April 2010, the most since February 2010.

‘Transitory’ Increase

Dudley’s view echoed Bernanke, who said last month he expects inflation resulting from higher commodities prices to be “transitory.”

Weakness in growth in the first quarter was probably temporary and was caused by lower consumer spending due to higher gas and food prices, Dudley said. He said he was encouraged by the latest report on employment.

The Labor Department said May 6 the economy added 244,000 jobs in April with non-government employers added 268,000 jobs, the best month for the private sector of the economy since 2006. Other job market data remain weak, as the unemployment rate has been stuck near 9 percent or higher for 25 months.

Still, “unemployment remains unacceptably high” and “even if the economy added 300,000 jobs per month from now on, we would likely still have considerable labor market slack at the end of 2012.”

‘Downside Risks’

The New York Fed leader said “downside risks” to growth included the effect on food and energy prices on households, declining home prices and the effect of lower government spending on growth.

The economy grew at a 1.8 percent pace in the first quarter of 2011, according to Commerce Department data.

Growth will pick up to 3.3 percent in the current quarter and 2.7 percent for the year, according to the median of 67 economists surveyed this month by Bloomberg News.

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Federal Reserve Bank of New York President William Dudley said the central bank is falling short of its goals because of the modest pace of the recovery, with unemployment too high and headline inflation likely to ease. The recovery remains moderate and we still have a...
Thursday, 19 May 2011 02:09 PM
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