For now the Federal Reserve must push hard against threats to the U.S. recovery even though it still plans to reduce its support for the economy later this year, an influential central bank policy maker said on Monday.
In a strong defense of the Fed’s shock decision last week to keep buying bonds unabated, New York Fed President William Dudley warned in a speech that fiscal uncertainties “loom very large” as Congress prepares to hash out a deal to avoid a government shutdown and raise the nation’s debt ceiling.
At a separate New York event, Atlanta Fed President Dennis Lockhart likewise warned that America risked “losing its economic mojo” unless lawmakers worked to reverse declines in labour productivity and new job creation.
Last week, investors were stunned when the Fed decided not to reduce its asset purchases from the current $85-billion (U.S.) monthly pace, sparking a global stock rally. The decision prompted criticism that policy makers got cold feet despite improving employment and economic growth, and that they misled investors.
But Dudley, a close ally of Fed Chairman Ben Bernanke, highlighted drags from the sharp recent rise in longer-term interest rates, higher taxes and lower public spending adopted earlier this year, as well as growing questions over the debt limit and government funding.
“We must push against these headwinds forcefully to best achieve our objectives,” Dudley, a consistent policy dove and a permanent voting member of the central bank’s monetary policy committee, said at Fordham University.
Stocks and bonds surged and the U.S. dollar dropped last week after the Fed’s policy decision.
Many economists wondered whether Bernanke had backpedaled from a plan that he articulated in June in which the Fed aimed to reduce the purchases later this year and to halt the quantitative easing (QE) program altogether by mid-2014, as long as the U.S. economy keeps improving.
But in what may come as another surprise, Dudley said on Monday that framework “is still very much intact.” He noted that, back in June, Bernanke did not specify the first reduction to QE would come in September, and that it would be dependent on economic data.
Any reduction in QE must be based on the most recent measures of economic health, he said, arguing that two requirements have not yet been met: evidence the labour market has improved and confidence that those gains will continue.
“I’d like to see economic news that makes me more confident that we will see continued improvement in the labour market,” Dudley said. “Then I would feel comfortable that the time had come to cut the pace of asset purchases.”
Michael Feroli, an economist at JPMorgan, said Dudley’s speech hinted at “new QE goalposts” that focus somewhat more on gross domestic product growth.
At the least, Dudley appeared ready to wait until after Democrats and Republicans in Congress worked through budget questions that threatened to shut down government on Oct. 1. The politicians began debate on this Monday.
The U.S. jobless rate has fallen to 7.3 per cent as of last month from 8.1 per cent a year earlier. But Dudley said that drop masks much more modest improvement in hiring, job openings, quitting rates and the vacancy-to-unemployment ratio.
Changes to the asset-purchases “need to be anchored in an assessment of how the economy is actually performing, how financial conditions are evolving, and how this affects the longer-term outlook and the risks around it,” he said.
Dudley’s dovish speech appeared to push back on those, including some within the Fed, who point to broader economic progress since the third round of quantitative easing was launched a year ago, rather than sometimes poor monthly data.
Lockhart, a centrist who does not vote on the Fed’s policy committee this year, said the nation’s labour market had still not recovered.
“We’ve made a lot of progress, but there’s a way to go before the Fed can claim that the maximum employment objective has been achieved,” he said, referring to the central bank’s dual mandate from Congress, which also includes price stability.
Monthly U.S. non-farm job creation has slipped to an average of 148,000 in the past three months, versus 184,000 in the last 12 months, while labour productivity growth was averaging “significantly below historic norms,” he told a conference on creative leadership.
Lockhart did not comment specifically on last week’s policy decision. But he said monetary policy could aid economic dynamism by fostering favourable interest rates, provided that was “in a context of low and stable inflation.”
But he made clear that the central bank could only do so much, and the rest would be up to other public officials to come up with ways to improve the economic climate.
“Is America losing its economic mojo?” Lockhart asked. “There is some evidence to the affirmative.”