Fed's Dudley: focus on housing to help recovery

ISELIN, NJ Fri Jan 6, 2012 10:07am EST

Federal Reserve Bank of New York CEO William Dudley speaks at the Bretton Woods Committee International Council conference in Washington, September 23, 2011. REUTERS/Jonathan Ernst

Federal Reserve Bank of New York CEO William Dudley speaks at the Bretton Woods Committee International Council conference in Washington, September 23, 2011.

Credit: Reuters/Jonathan Ernst

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ISELIN, NJ (Reuters) - A top Federal Reserve official zeroed in on the weak housing market on Friday, arguing additional help should be considered to kick-start the sector and help the country's "frustratingly slow" economic recovery.

Monetary policy should work to complement national housing policy, which together could help to stabilize home prices and help the sector recover, New York Federal Reserve President William Dudley said at the New Jersey Bankers Association Economic Forum.

"Because the outlook for unemployment is unacceptably high relative to our dual mandate and the outlook for inflation is moderate, I believe it is also appropriate to continue to evaluate whether we could provide additional (policy) accommodation in a manner that produces more benefits than costs, regardless of whether action in housing is undertaken or not," he said.

"Monetary policy and housing policy are much more complements than substitutes."

Dudley, a policy dove who has a permanent voting seat on the central bank's policy-setting committee, has in the past suggested the Fed could potentially do more to drive down mortgage rates to support the sector, which has been a cause of the financial crisis and recession and a drag on the recovery.

The Fed has purchased Treasury debt and, to a lesser extent, mortgage-backed securities as part of its so-called quantitative easing efforts in the last three years. In response to the recession, the Fed late in 2008 slashed interest rates to near zero and has since bought $2.3 trillion in long-term securities to spur growth and keep the economy afloat.

The purchase of mortgage securities, however, was a controversial part of the first round of easing in 2009, attracting criticism from some officials for propping up a specific sector of the economy.

The Fed waded into the debate over what to do with Fannie Mae and Freddie Mac this week, arguing in a paper sent to lawmakers that the government-run mortgage finance firms could play a bigger role in turning around the housing market if they were allowed to provide cheaper mortgages to a broader pool of homeowners.

On Friday, Dudley called the white paper "a thoughtful analysis of housing policy."

A "truly comprehensive approach," he added, "would also include long-term reform -- including reform of Fannie Mae and Freddie Mac -- to put housing finance on a more stable footing and to equip the market to deal more effectively with any future systemic shocks."

Employment grew solidly last month and the jobless rate dropped to a near three-year low of 8.5 percent that, though still high, offered the strongest evidence yet of an acceleration in economic activity, according to data released Friday.

Unemployment was 4.5 percent in the middle of 2007.

The moribund housing market and European debt crisis, meanwhile, still threaten to derail a recovery from the worst U.S. recession in decades.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama and James Dalgleish)

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