Credit: Reuters/Andrew Burton
William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, answers questions during a lunch at the Council on Foreign Relations in New York, May 24, 2012.
The president of the Federal Reserve Bank of New York pointed to an improvement in the labor market last month and better-than-expected gross domestic product (GDP) growth in the third quarter, and he predicted a rise in economic growth next year and in 2015.
Dudley, a close ally of Fed Chairman Ben Bernanke, did not say what this rosier view might mean for the central bank's accommodative policy. But the comments may suggest the Fed as a whole is closer than otherwise thought to reducing the pace of its $85-billion in monthly asset purchases, which are meant to spur investment, hiring and growth.
'I have to admit that I am getting more hopeful,' Dudley, a permanent voter on the Fed's policy-setting committee, told students and professors 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.'
Though he warned of 'substantial uncertainty' in his forecast, Dudley was clearly more upbeat than the last time he publicly weighed in on the state of the economy in the wake of the 2007-2009 recession.
In late September, Dudley said the labor market was still not healthy and the broader recovery still needed monetary support from the Fed including the quantitative easing program, known as QE.
'TURNING POINT FOR THE ECONOMY'
On Monday he predicted less interference from fiscal policies, better private-sector growth, and a 'fairly cyclical' recovery in consumer spending and durable goods.
Dudley also noted banks have eased credit standards, and he predicted an improvement in labor market conditions and a positive 'updrift' in still-low U.S. inflation as the pace of GDP growth picks up over the next two years.
Adding to the positive picture, the Fed policymaker said the sustained contraction in state- and local-government spending and employment 'appears to be over.'
U.S. stocks edged slightly higher after Dudley took to the podium, but remained mostly flat after hitting a fresh record high earlier on Monday.
Dudley's speech - part of a tour of New York's ethnically diverse Queens borough that includes a tour of a piano factory - comes days after fellow Fed policy-maker Janet Yellen strongly defended the Fed's bold steps to spur economic growth.
Yellen, President Barack Obama's nominee to succeed Bernanke in February, made it clear at a Senate committee hearing that she would push on with easy policies until she was satisfied a durable recovery was in place.
U.S. GDP growth was 2.8 percent in the third quarter of this year, and employers added 204,000 new jobs to their payrolls in October, data that suggests the economy was able to weather the 16-day government shutdown last month.
Calling these 'nascent signs that the economy may be doing better,' Dudley said: 'I hope that this marks a turning point for the economy.'
Yet the unemployment rate remains high at 7.3 percent, and the Fed has said it wants to see substantial improvement on that front before winding down purchases of Treasury and mortgage bonds.
QE has been in place for 14 straight months, sowing concerns among some more hawkish Fed policymakers that the Fed's $3.8-trillion balance sheet will bring about asset-price bubbles or inflation on the horizon.
(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)
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