US economy not ready for tapering, says Fed official
~By Robin Harding in Washington and Vivianne Rodrigues in New York
“The economy has not picked up forward momentum and a 2 per cent growth rate – even if sustained – might not be sufficient to generate further improvement in labour market conditions,” said William Dudley, president of the New York Fed and vice-chair of the rate-setting Federal Open Market Committee.
Markets were thrown into turmoil when the Fed chose not to reduce its asset purchases last week and chairman Ben Bernanke seemed to back away from some of the guidance that the Fed gave in June.
In a sign that last week’s decision provoked strong disagreement on the FOMC, Richard Fisher of the Dallas Fed said he had opposed it, arguing that doing nothing would increase uncertainty about future policy and call the credibility of Fed communications into question.
“I believe that is exactly what has occurred, though I take no pleasure in saying so,” said Mr Fisher, who does not vote on monetary policy this year, in a speech in San Antonio.
Demand for US Treasuries rose after Mr Dudley’s speech with yields on the 10-year benchmark note down by 3 basis points to 2.7 per cent, their lowest level in almost a month. Stocks declined, halting three weeks of gains, as a fall in financial shares sent the S&P 500 0.6 per cent lower by midday in New York.
“Our decisions on how to adjust our policy tools – for example, the pace of asset purchases and forward guidance with respect to the level of short-term rates – must be rooted in the ongoing flow of information that informs our judgments about the prospects for a sustainable recovery,” he said in a speech at the Fordham University business school in New York on Monday.
Mr Dudley described the economy as a battle between improving fundamentals and a big squeeze from public spending cuts and tax rises. But he was downbeat about the outlook, saying that drag from fiscal policy may extend into next year, and income growth was not fast enough to support strong rises in consumption.
He pointed to the effect of higher mortgage rates on the housing sector, noted a slowdown in emerging markets that could affect exports,and argued there was still spare capacity in manufacturing, so that companies had little reason to increase investment.
“Putting all these factors together, I still conclude that there is a basis for a pickup in growth as fiscal restraint lessens, but the impulse is not likely to be a particularly powerful one without some unanticipated impetus to growth,” said Mr Dudley.
Mr Dudley said he had two tests for starting to taper buying: evidence of labour market improvement and evidence of enough economic momentum to keep the improvement going. “So far, I think we have made progress with respect to these metrics, but have not yet achieved success,” he said.
He said the second test of forward momentum had not been passed and drew particular attention to high fiscal uncertainties as Congress considers how to fund the government and raise the debt ceiling.
“Assuming no change in my assessment of the efficacy and costs associated with the purchase programme, I’d like to see economic news that makes me more confident that we will see continued improvement in the labour market,” said Mr Dudley. “Then I would feel comfortable that the time had come to cut the pace of asset purchases.”
