Fed’s Dudley: Two key tests show economy too fragile to begin tapering


WASHINGTON -- A top Federal Reserve policymaker said Monday that the economy still wasn’t strong enough in two key areas to begin tapering the central bank’s bond-buying stimulus program, particularly with budget and debt-limit fights looming.

“In my view, the economy is slowly healing,” William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech at Fordham University.

“But, while significant progress has been made since the end of the recession, there remain a number of headwinds that have offset the improvement in the underlying fundamentals,” he said. “In my view, the economy still needs the support of a very accommodative monetary policy.”


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Dudley was among the Federal Open Market Committee members who voted 9-1 last week to continue purchasing $85 billion in Treasury bond and mortgage-backed securities each month.

Given recent comments by Fed officials, many economists and investors had expected the Fed to announce a reduction in those monthly purchases.

But Fed Chairman Ben S. Bernanke said last week that the economy -- specifically the labor market -- still hadn’t shown enough improvement to start reducing the purchases.

On Monday, Dudley explained why he voted not to start tapering.

Dudley said he had two tests the economy needed to pass before he would start reducing the bond purchases, which began a year ago.

First, there has to be evidence of labor market improvement. And second, economic growth needs to have enough “forward momentum” for him to believe those improvements would continue.

“So far, I think we have made progress with respect to these metrics, but have not yet achieved success,” Dudley said.

The unemployment rate has dropped from 8.1% when the bond-buying began to 7.3% in August.

But Dudley said the rate’s decline “overstates the degree of improvement.” Other measures show that the improvement has been “much more modest” and that it still is difficult for many unemployed people to find jobs.

In addition, Dudley said the recent tepid economic growth does not make him confident the jobs market would continue to improve.

“Moreover, fiscal uncertainties loom very large right now as Congress considers the issues of funding the government and raising the debt-limit ceiling,” he said.

A federal government shutdown could take place starting Oct. 1 if President Obama and congressional Republicans can’t end their standoff over a budget bill -- and the nation could face its first-ever default if the debt limit is not raised in the coming weeks.

Republicans are demanding spending cuts and other concessions to agree to raise the $16.7-trillion debt limit. But Obama is refusing to negotiate, saying Congress has the responsibility to raise the debt limit because it allows borrowing for spending lawmakers already have authorized.

“The economic fundamentals are improving, and I expect that the healing process will continue in the coming months and years,” Dudley said. “At the same time, it is important to recognize that the financial crisis generated significant headwinds that are only slowly abating.”


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