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Fed's Dudley sees no reason to reverse course

Reuters News
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Posted: Apr 01, 2011 11:28 AM
Fed's Dudley sees no reason to reverse course

By Kristina Cooke

SAN JUAN, Puerto Rico (Reuters) - The U.S. economy may add jobs more rapidly in coming months as the recovery gathers steam, but that is not a reason for the Federal Reserve to reverse course, a top Fed official said on Friday.

The U.S. central bank has kept interest rates near zero since December 2008 and launched a $600 billion bond-purchase program in November designed to further support the U.S. economic recovery. At its last meeting, the Fed unanimously voted to keep the bond purchase program, which is scheduled to be completed in June, unchanged.

"We are still very far away from achieving our dual mandate of maximum sustainable employment and price stability," William Dudley, president of the New York Federal Reserve Bank, told the E-3 Summit of the Americas in San Juan, Puerto Rico.

"Faster progress toward these objectives would be very welcome."

The president of the New York Fed has a permanent voting seat on the Fed's policy-setting panel. Dudley's recent views have been "dovish" on inflation.

While highlighting some signs of optimism on the economy, Dudley cautioned that progress could be slowed by the effects from Japan's devastating earthquake and tsunami and from high oil prices due to unrest in the Middle East and North Africa.

He called employment data released earlier on Friday by the U.S. government that showed a second straight month of solid jobs gains "good news." But he said the Fed would need to see sustained strong employment growth to be sure that a "virtuous circle" -- in which rising demand generates more rapid income and employment growth and leads to more consumer spending -- has become firmly established.

Along with the gains in hiring, the U.S. government reported a decline in the jobless rate in March to a two-year low of 8.8 percent. Graphic: http://r.reuters.com/kab88r

While there is still uncertainty about the speed of the labor market recovery, Dudley said he is becoming more optimistic and is "hopeful that jobs growth will increase more rapidly in the coming months."

He reiterated, however, that even if the economy were to add 300,000 jobs per month, there would still likely be considerable slack in the labor market at the end of 2012.

The U.S. Labor Department on Friday reported a gain of 216,000 jobs in March, the largest increase since May, a gain that Dudley described as "notable." The private sector accounted for all the gains, with government employment falling for a fifth straight month in March.

While pointing to improvement in household and financial institutions' balance sheets, Dudley warned that policymakers must not be "overly optimistic" about the growth outlook.

"In recent weeks, we have experienced several shocks from abroad that could have some impact on the economy's forward momentum, at least in the short-term," Dudley said.

He said the earthquake and tsunami in Japan has led to supply disruptions, which could "dampen growth somewhat in the near-term." He added that higher oil prices due to unrest in the Middle East and North Africa are cutting into households' spending power.

"Conditions in Japan, the Middle East and North Africa remain uncertain and could worsen, with negative implications for global economic growth," he said.

U.S. housing activity also "remains unusually weak", he added.

Commodity prices are likely to continue to put pressure on inflation, he said, but as long as they level off around current levels their effect "should be transitory," he said.

He reiterated that it is important to ensure commodity price pressures don't cause the public's expectations for future inflation to become unanchored.

Puerto Rico is part of the New York Fed's district.

(Reporting by Kristina Cooke; Editing by Leslie Adler)