US Federal Reserve Bank of New York President William Dudley said he sees a “reasonably favorable” outlook for the US economy, even as elevated joblessness and too-low inflation warrant a high level of stimulus for a “considerable time.”
“I would very much prefer faster economic growth and more rapid progress towards our dual mandate objectives of maximum sustainable employment and price stability,” Dudley said on Friday in the text of remarks given at Brooklyn College in New York. “Hence, the continued need for monetary policy to remain highly accommodative to support the economic recovery to the fullest.”
Dudley said a decline in the jobless rate “significantly overstates the degree of improvement in the labor market” because much of the decrease has been caused by people dropping out of the market. Unemployment fell to 6.7 percent in December last year, close to the Fed’s threshold for considering an increase in the benchmark interest rate, from June’s 7.5 percent last year.
Dudley is among policy makers who say the central bank should move away from its year-old unemployment threshold of 6.5 percent and instead look at a broader array of indicators to assess the health of the job market. At a forum on Thursday, Dudley said he prefers a “qualitative” approach to communicating the Fed’s views on the likely path of interest rates.
“I do expect that growth will be strong enough to lead to continued improvement in labor-market conditions,” said Dudley, who is also vice chairman of the policy-setting US Federal Open Market Committee, on Friday.
“I must caution, however, that the outlook for the unemployment rate is unusually uncertain” because an improving labor market should prompt discouraged workers to seek jobs, Dudley said. “Such developments could result in a more muted rate of decline of the unemployment rate despite the faster growth.”
Market expectations that the Fed will raise the main interest rate “around the middle of 2015” are “a very reasonable set of expectations,” Dudley said in response to an audience question.
The US labor market still shows “substantial slack” even with the declines in joblessness, Dudley said.
“It’s very important not to overemphasize the unemployment rate,” he said. “It’s important to look at a broader set of labor-market indicators.”
Dudley reiterated his view that harsh winter weather will slow growth during the first quarter, while predicting “sustained growth above the roughly 2.25 percent annual pace that prevailed from mid-2009 through mid-2013.”
On Thursday, Dudley said at an event in New York that the weather would shave 0.5 percentage point to 1 percentage point off of the annualized growth rate during the first quarter. The drag will not be enough to merit slowing the tapering of the Fed’s bond purchases, he said.
Dudley said he sees little immediate threat to the US economy from the crisis in Ukraine.
“The direct channels of the Ukraine back to the U.S. are very mild,” he said in response to an audience question. “We are trying to assess what it means.”
Dudley said on Friday he expects inflation to rise toward the Fed’s 2 percent target. Prices rose 1.2 percent in the 12-month period ended in January, according to the personal consumption expenditures price index, the central bank’s preferred gauge.