Fed's Dudley, a staunch dove, turns upbeat on U.S. economy

NEW YORK Mon Nov 18, 2013 2:06pm EST

William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, answers questions during a lunch at the Council on Foreign Relations in New York, May 24, 2012. REUTERS/Andrew Burton

William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, answers questions during a lunch at the Council on Foreign Relations in New York, May 24, 2012.

Credit: Reuters/Andrew Burton

NEW YORK (Reuters) - William Dudley, an influential U.S. central banker who has been one of the staunchest supporters of easy-money policies, on Monday said he was "getting more hopeful" on prospects for the beleaguered U.S. economic recovery.

The president of the Federal Reserve Bank of New York pointed to an improvement in the labor market last month and better-than-expected gross domestic product (GDP) growth in the third quarter, and he predicted a rise in economic growth next year and especially in 2015.

Despite the rosier assessment, Dudley, a close ally of Fed Chairman Ben Bernanke, said he anticipates "very accommodative" monetary policy to be in place "for a considerable period of time" given low inflation and high unemployment in the world's biggest economy.

His comments on the U.S. recovery may however suggest the Fed as a whole is closer than otherwise thought to reducing the pace of its $85-billion in monthly asset purchases, which are meant to spur investment, hiring and growth.

"I have to admit that I am getting more hopeful," Dudley, a permanent voter on the Fed's policy-setting committee, told students and professors at Queens College in New York.

"Not only do we have some better data in hand, but also the fiscal drag, which has been holding the economy back, is likely to abate considerably over the next few years at the same time that the fundamental underpinnings of the economy are improving."

In response to student questions, he said the Fed remains convinced the benefits of the quantitative easing program (QE) outweigh the costs, adding there are no current signs the bond-buying is leading to "disturbing" asset bubbles.

Dudley's speech - part of a tour of New York's ethnically diverse Queens borough that includes a tour of a piano factory - comes days after fellow Fed policy-maker Janet Yellen strongly defended the Fed's bold steps to spur economic growth.

Though he warned of "substantial uncertainty" in his forecast, Dudley was clearly more upbeat than the last time he publicly weighed in on the state of the economy in the wake of the 2007-2009 recession.

In late September, Dudley said the labor market was not yet healthy and the broader recovery still needed monetary support from the Fed.

'TURNING POINT FOR THE ECONOMY'

On Monday he predicted less interference from fiscal policies, better private-sector growth, and a "fairly cyclical" recovery in consumer spending and durable goods.

Dudley also noted banks have eased credit standards, and he predicted an improvement in labor market conditions and a positive "updrift" in still-low U.S. inflation as the pace of GDP growth picks up over the next two years.

Adding to the positive picture, the Fed policymaker said the sustained contraction in state- and local-government spending and employment "appears to be over."

U.S. stocks remained near record highs after Dudley took to the podium. Investors are trying to predict whether the Fed will trim the pace of asset purchases at a policy meeting next month, or wait until some time in the new year, possibly when Yellen takes the reins.

Yellen, President Barack Obama's nominee to succeed Bernanke in February, made it clear at a Senate committee hearing that she would push on with easy policies until she was satisfied a durable recovery was in place.

U.S. GDP growth was 2.8 percent in the third quarter of this year, and employers added 204,000 new jobs to their payrolls in October, data that suggests the economy was able to weather the 16-day government shutdown last month.

Calling these "nascent signs that the economy may be doing better," Dudley said: "I hope that this marks a turning point for the economy."

Yet the unemployment rate remains high at 7.3 percent, and the Fed has said it wants to see substantial improvement on that front before winding down purchases of Treasury and mortgage bonds.

"We can definitely in my mind have a significantly tighter labor market and bring a lot of the unemployed and discouraged workers back to the workforce without having an inflation problem," Dudley said.

"That's why monetary policy is very accommodative today, and that's why I anticipate monetary policy is going to be very accommodative for a considerable period of time."

QE has been in place for 14 straight months, sowing concerns among some more hawkish Fed policymakers that the Fed's $3.8-trillion balance sheet will bring about asset-price bubbles or inflation on the horizon.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama and Chris Reese)

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