* Further easing depends on economy's evolution: Dudley
* Rates could rise sooner, later than late 2014, he says
* Benchmark yields near 4-month highs as market makes bets
By Jonathan Spicer
MELVILLE, New York, March 19 The U.S. Federal
Reserve has not yet decided whether to embark on a third round
of quantitative easing, or QE3, though it remains an option, an
influential Fed official said on Monday.
New York Fed President William Dudley, a close ally of
Chairman Ben Bernanke, painted a mixed picture of the U.S.
economy, tempering recent signs the recovery is gaining speed
with warnings that it could just as easily stall out.
"Nothing has been decided," he said of QE3, in which the Fed
would make large-scale asset purchases in an attempt to lower
rates and give the economy another controversial shot of
"It all depends on how the economy evolves," Dudley added.
"It's about costs and benefits, and if we get to a point where
we think the benefits of another program of QE outweigh the
costs, then we'll certainly do so."
Dudley, like Bernanke in recent testimony to Congress,
defended the central bank's ultra-easy policy stance but did not
offer any guidance on what more the Fed was prepared to do to
help the recovery and ratchet down the unemployment rate, which
remains a high 8.3 percent.
Another Fed official said he believes it would do the
economy no good for the central bank to ease further.
"We have filled the tanks, there is plenty of liquidity. We
need no more," Dallas Federal Reserve President Richard Fisher
told a roundtable discussion at a business event in London.
Fisher, an outspoken policy hawk who has been critical of
the Fed's last round of asset purchases, is not a voter on the
central bank's policy-setting panel this year.
2013 OR 2014?
After a meeting in Washington last week, the Fed's
policy-setting committee made no policy change and gave few
clues on how it interpreted recent jobs growth, coupled as it
has been with worries over GDP growth and oil price-driven
The committee did, however, restate its expectation to keep
interest rates ultra-low through late 2014. Asked about that on
Monday, Dudley said: "They (rates) might increase sooner, they
might increase later, depending on how the economy evolves.
"If the economy were to change in a meaningful way then
obviously we would change our forecast."
Economic reports in recent weeks have supported an upbeat
view about the recovery, and many in financial markets have
begun to lower expectations the Fed would have to take further
steps to bolster growth.
After the Fed's January meeting, financial markets were
pricing in a first rate hike by July 2014. Now - after reports
showing employers added a total of 511,000 workers in January
and February - they are pricing in a first rate hike by July
Benchmark yields were hovering near four-month highs on
Monday as investors pared bond holdings on signs of a
strengthening U.S. economy and some stabilization in Europe's
Dudley said U.S. economic activity is not yet strong or
sustained enough to put a dent in the economy's "slack," which
is keeping many Americans out of work some three years after the
deep recession ended.
"The incoming data on the U.S. economy has been a bit more
upbeat of late, suggesting that the recovery may be finally
establishing a somewhat firmer footing," Dudley said, citing
expanding GDP late last year, payrolls, sales of motor vehicles,
and somewhat firmer housing starts.
"While these developments are certainly encouraging, it is
far too soon to conclude that we are out of the woods," Dudley,
a policy dove with a permanent vote on the Fed's policy-setting
committee, told a gathering of the Long Island Association
before touring a nearby music products manufacturer, D'Addario &
GASOLINE AND OTHER HEADWINDS
The U.S. central bank has kept interest rates near zero
since late 2008 and bought $2.3 trillion in long-term securities
to help revive the economy after the 2007-2009 recession.
Upbeat data so far this year has tempted some, including
some Fed policymakers, to say the recovery is well under way and
that the Fed will take no further steps.
Yet Bernanke and others have said more bond purchases remain
an option. Last year, Dudley was among the most vocal about the
efficacy of buying mortgage-based securities to help revive that
sector of the economy.
Dudley warned that higher gasoline prices are "definitely" a
risk to the world's largest economy, as they crimp consumers'
ability to spend on other items. But he did not see higher pump
prices fueling broader inflation.
"The upward pressure on prices caused by rising gasoline are
offset by downward pressure on prices caused by all the excess
slack in the U.S. economy," he said. "It's very hard to have an
inflation problem when compensation costs are rising quite
The annual rate of core inflation, Dudley argued, "has
peaked and we expect it to begin to decline later this year." He
added that inflation expectations "remain well anchored."
Besides gas, other headwinds include impediments to the
housing sector, fiscal drags at the federal and state levels,
and risks that foreign growth is weaker than expected, Dudley
Bernanke, who along with Dudley spearheaded the Fed's
unprecedented and easy policy steps, is set to deliver a public
lecture on Tuesday.