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Fed's Dudley more hopeful on economy, says private sector nearly healed

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WASHINGTON -- A top Federal Reserve official said Monday he was "getting more hopeful" about the economic recovery and declared the private sector nearly healed from the Great Recession.

William C. Dudley, the president of the Federal Reserve Bank of New York, said he saw "nascent signs" that the economy and the outlook were improving because the negative effects of federal tax increases and budget cuts should lessen in coming years.

"I have to admit that I am getting more hopeful," Dudley, who has strongly supported the Fed's stimulus policies, said in a speech at Queens College in New York.

"Not only do we have some better data in hand, but also the fiscal drag, which has been holding the economy back, is likely to abate considerably over the next few years at the same time that the fundamental underpinnings of the economy are improving," he said.

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Although growth has been disappointing this year, the economy has expanded at a decent pace despite the tax increases that kicked in as part of the so-called fiscal cliff deal and start of healthcare reform, as well as the automatic federal spending cuts known as the sequester.

A key reason has been the improved health of private companies, Dudley said.

"The fact that the U.S. economy has continued to grow at around a 2% pace in 2013 despite this quite intense fiscal restraint provides evidence.... that the private sector of the economy has largely completed its healing process and is now poised to ramp up its level of activity," Dudley said.

In addition, the housing market recovery and improving growth forecasts among U.S. trading partners such as European nations could provide a boost to exports.

Dudley is one of 12 voting members of the policy-making Federal Open Market Committee that is trying to determine when to start reducing the central bank's $85-billion-a-month bond-buying program.

He offered no indication of whether the Fed would vote to taper those purchases at its next meeting, in December. But his largely upbeat tone could signal the Fed is getting ready to act.

Dudley sounded more optimistic about the recovery than he did in a speech in late September after he and his Fed colleagues surprised financial markets and decided not to start cutting back on the stimulus program.

At the time, he said the economy wasn't strong enough to begin tapering.

Despite the brighter assessment Monday, Dudley cautioned about continued problems.

Although the unemployment rate has dropped to 7.3% since its recent peak of 10% in October 2009, "a significant portion of that decline" comes from people dropping out of the labor force, he said.

Dudley expects economic growth to accelerate in 2014 and 2015. But he said "the notion that the economy will grow more swiftly remains a forecast rather than a reality at this point."

Because of that, and the potential for "some unforeseen shock," the Fed will continue to monitor economic conditions closely and "will adjust our views on the likely path for growth, inflation and the unemployment rate accordingly," Dudley said.

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