Fed will do its part to aid U.S. recovery, Dudley says

NEW YORK (Reuters) - Much work remains to maximize U.S. employment and stabilize prices in the face of a "sluggish" economic recovery, and the Federal Reserve will do its part, said the head of the New York Fed bank.

Unemployment is likely to remain "unacceptably high" for some time and inflation is likely to be below 2 percent, the Fed's new objective, for several years, New York Fed President William Dudley said.

"Clearly, much work remains to achieve the Fed's dual mandate of maximum sustainable employment in the context of price stability," Dudley told reporters after a speech at the New York Fed.

The comments come two days after the Fed offered a bleak outlook for the economy and Chairman Ben Bernanke said the central bank stood ready to offer more stimulus in the form of bond purchases if inflation stays below 2 percent and if unemployment, now at 8.5 percent, remains high.

The speech by Dudley, who has emphasized driving down the high jobless numbers, could reassure those who see another round of Fed asset purchases - including mortgage-backed securities - as all but inevitable.

The Fed, which has kept interest rates near zero for more than three years, "has done and will continue to do its part in supporting the recovery - but it is not all-powerful," Dudley said.

"Other complementary policy actions in housing, fiscal policy and structural adjustment or rebalancing of the economy will be essential if we are to achieve the best available recovery."

NO PANIC

Aside from the low rates, the Fed has also bought $2.3 trillion in long-term securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades. Yet the recovery has been slow, leading the central bank to say on Wednesday that it expects to keep rates "exceptionally low" at least through late 2014.

Asked about that target, which is more than one year later than the Fed's previous date, Dudley said the move does not suggest Fed policymakers are panicked. "I don't sense any panic whatsoever, speaking for myself," he said.

Dudley, a permanent voter on the Fed's policy-setting committee, expects "moderate" growth this year, and warned the risks are skewed to the downside in part because of Europe's debt crisis.

The economy continues to operate with "significant excess slack," he said, adding that inflation has retreated and may be headed down further, while he expects job growth this year to be "not that different from what we've been experiencing."

Still, the slow overall recovery has cast some doubt on the central bank's far-reaching strategy, with some, including congressional Republicans, warning that the massive quantitative easing efforts over the last few years could crimp the Fed's ability to tighten policy when the time comes.

The Fed and Bernanke in particular have been sharply criticized throughout the Republican presidential campaign.

The Fed's ultra easy monetary policy stance, to nurse the recovery, got some support from data on Friday showing U.S. gross domestic product expanded at a 2.8 percent annual rate in the fourth quarter of 2011.

It was a sharp acceleration from the 1.8 percent clip of the prior three months and the quickest pace since the second quarter of 2010. But it was a touch below economist expectations in a Reuters poll for a 3 percent rate.

Recent data from employment to manufacturing to consumer credit suggest the world's largest economy gained momentum going into 2012, but Bernanke said Wednesday the Fed was not yet ready to "declare that we've entered a new, stronger phase."

(Reporting by Jonathan Spicer; Editing by Kenneth Barry and Andrew Hay)