Fed not anxious to remove easy policy: Dudley

NEW YORK Mon Oct 15, 2012 9:52am EDT

William Dudley, President and CEO of the Federal Reserve Bank of New York, speaks during the Asia Society and Economic Club of New York luncheon, in New York, September 24, 2012. REUTERS/Chip East

William Dudley, President and CEO of the Federal Reserve Bank of New York, speaks during the Asia Society and Economic Club of New York luncheon, in New York, September 24, 2012.

Credit: Reuters/Chip East

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NEW YORK (Reuters) - The Federal Reserve is not anxious to remove policy accommodation at the first sign of positive news on U.S. economic growth, an influential Fed official said on Monday.

Doubling down on the central bank's big monetary easing move last month, New York Fed President William Dudley said the policy stance would "evolve" only once "we became confident that the recovery was securely established."

"If we were to see some good news on growth I would not expect us to respond in a hasty manner," said Dudley, a permanent voter on the Fed's policy-setting committee and a close ally of Fed Chairman Ben Bernanke.

Further, fears that the Fed's extraordinary stimulus steps will cause financial asset bubbles or inflation are misplaced, Dudley told the National Association for Business Economics.

Having kept interest rates near zero for almost four years, the Fed last month launched a third, massive bond-buying program to help boost tepid U.S. growth and to help Americans get back to work. Policymakers also said the Fed would keep policy easy for a "considerable time after the economic recovery strengthens," and forecast low rates through mid-2015.

Since then, a debate has grown over what would prompt the Fed to finally tighten policy, and the risks the Fed runs in driving deeper into uncharted policy territory.

While some of Dudley's colleagues, such as Chicago Fed President Charles Evans, want to set specific markers based on unemployment or inflation that would prompt the Fed to adjust its policy, others like the Philadelphia Fed's Charles Plosser warn that is no easy task and has its risks.

Weighing in on this, Dudley argued it is "hard to summarize the economy" in such a way that would provide more transparency, though he indicated he would like the central bank to move in that direction.

On the question of inflation concerns, Dudley said the Fed's ability to adjust the interest it pays banks to park funds there - called interest on excess reserves, or IOER - "means we can keep inflation in check regardless the size of our balance sheet."

The central bank could in theory raise this rate if it wanted to curb a surge in credit demand.

That is not the problem the Fed has now.

U.S. growth cooled in the second quarter to 1.3 percent, and forecasters do not think the economy is expanding much faster. Unemployment, having remained above 8.0 percent for three-and-a-half years, fell sharply to 7.8 percent in September, but analysts say growth is not strong enough for that to be sustained.

"In my view, while the costs (of stimulus) are real and need to be carefully evaluated, they pale relative to the costs of not achieving a sustainable economic recovery," Dudley said at a hotel in downtown Manhattan. "A failure in that regard would lead to widespread chronic unemployment."

The U.S. economic recovery has been consistently weaker than anticipated since the sharp financial crisis and recession of 2007-2009. Citing this, Dudley went so far as to say that, with hindsight, monetary policy "needed to be still more aggressive."

The policymaker avoided specific forecasts, but gave a nuanced view of the months and years ahead.

"If the economy were to continue to underperform, and experienced a severe shock, there would be some risk of getting stuck in a deflationary situation in which monetary policy would be even less effective," he said.

"Although the outlook for the U.S. economy remains somewhat cloudy as we look into 2013, I remain a long-run optimist about where we are headed," Dudley added later. "The long term prospects of the U.S. economy are excellent." (Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

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