Fed's Dudley ties bond buying to impact of US fiscal policy

NEW YORK Tue May 21, 2013 1:03pm EDT

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NEW YORK May 21 (Reuters) - The U.S. economy's ability in coming months to weather lower government spending and higher taxes will be key to the Federal Reserve's decision whether to reduce monetary accommodation, an influential Fed official said on Tuesday.

In a speech that could dampen some expectations of a reduction in the U.S. central bank's bond buying program, New York Fed President William Dudley said he cannot be sure whether policymakers will next reduce or increase the amount of purchases, due to the "uncertain" economic outlook.

"But at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook," Dudley said in prepared remarks to the Japan Society.

"At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases," he added. "Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment."

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