U.S. economy has room to run: NY Fed's Dudley

NEW YORK Mon Feb 28, 2011 3:06pm EST

President of the New York Federal Reserve Bank William Dudley speaks at the World Leaders Forum at Columbia University in New York in this December 7, 2009 file photo. REUTERS/Finbarr O'Reilly

President of the New York Federal Reserve Bank William Dudley speaks at the World Leaders Forum at Columbia University in New York in this December 7, 2009 file photo.

Credit: Reuters/Finbarr O'Reilly

NEW YORK (Reuters) - New York Federal Reserve Bank President William Dudley said on Monday it is too soon for the central bank to withdraw support for the economy, although officials will need to make sure soaring oil prices do not touch off an inflationary psychology.

"The economic outlook has improved considerably," Dudley said at New York University's Stern School of Business. "Despite this, we are still very far from achieving our dual mandate of maximum sustainable employment and price stability."

Dudley, who has a permanent vote on the central bank's policy-setting Federal Open Market Committee, has a reputation as being one of the strongest supporters of aggressive Fed actions to bolster the economy.

While seen as a dove on the spectrum of Fed officials, he is the vice-chairman of the FOMC and his views are influential in shaping the consensus behind policy.

The primary shaper of that consensus, Fed Chairman Ben Bernanke, delivers the central bank's monetary policy report to Congress with testimony on Tuesday and Wednesday.

Bernanke is expected to renew the message he has delivered in recent appearances that while the recovery has strengthened, job markets have a long way to go before policymakers can pull back from supporting the economy.

He is also expected to describe the recent rise in oil price spikes as a potential risk to growth and play down the danger the price spike will stoke broad inflation.

"We expect Fed Chairman Bernanke to once again emphasize that officials are in no rush to tighten" policy, said James O'Sullivan, chief economist MF Global.

The Fed has committed to buy $600 billion in government debt by the end of June, although some Fed officials have said it might be wise to taper off or curtail the purchases given recent signs of economic strength.

DEBATE BREWING

One advocate of curbing bond buying, St. Louis Fed President James Bullard, repeated his suggestion on Monday that the Fed should consider stopping about $100 billion short of its current commitment.

"We're in very good shape for 2011," Bullard said on CNBC.

Bullard is not a voter on the FOMC this year, but he is viewed as a centrist and his support for curtailing the bond-buying plan portends a lively debate on the topic at the Fed's next meeting on March 15.

The U.S. economy exited recession in June 2009, but the recovery has been lackluster and the jobless rate stands at an elevated 9 percent.

GDP expanded at a sluggish 2.8 percent annual rate in the fourth quarter, and some analysts have scaled back expectations for the first quarter to around 3.5 percent from about 4 percent in light of softer than expected consumer spending.

Dudley said recent increases in commodity prices bear watching despite ample spare capacity in the economy, but he added that there has been little pass through from higher commodity prices into core inflation.

While economists generally believe inflation has bottomed, core price measures are not far from record lows.

The biggest risk, he said, is that of an inflationary psychology taking root, and he stressed that policymakers would be vigilant against that possibility.

"A sustained rise in medium-term inflation expectations would represent a threat to our price stability mandate and would not be tolerated," he said.

Otherwise, he said the economy appeared to have plenty of room to run. Even if it were to add 300,000 jobs a month, there would still be "considerable slack" in the labor market at the end of 2012, he said.

Job gains have been well short of that level in recent months. A report on Friday is expected to show U.S. employers added 186,000 jobs in February.

A third Fed official warned of underestimating risks from sovereign debt crises and state and local government woes.

"Unlikely events can happen, and when they do, the outcomes can be quite costly for everyone," Boston Fed President Eric Rosengren said in remarks at Boston University. Rosengren does not have a vote on monetary policy this year.

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