Reflections on the Economic Outlook and the Implications for Monetary Policy

by Sabrina I. Pacifici on September 23, 2013

William C. Dudley, President and Chief Executive Officer, Federal Reserve Bank of New York – Remarks at Fordham Wall Street Council, Fordham University Graduate School of Business, New York City, As prepared for delivery: “…This morning my remarks will focus on the U.S. economic outlook.  I am also going to discuss a new tool that the New York Fed will  begin to test—an overnight, fixed-rate full allotment reverse repo facility.  I want to dispel any misconceptions about why we are doing this testing.  The introduction of this facility is not a precursor to a change in the stance of monetary policy.  Instead, the goal of this new facility is to improve our control over overnight interest rates to aid us in the implementation of monetary policy…Let me start by summarizing my main points regarding the economic outlook.  In my view, the economy is slowly healing.  But, while significant progress has been made since the end of the recession, there remain a number of headwinds that have offset the improvement in the underlying fundamentals.  As a result, we have yet to see any meaningful pickup in the economy’s forward momentum. The most notable recent headwind, of course, has been the large amount of fiscal drag this year from the payroll and income tax increases and the budget sequester.  Also noteworthy is the tightening of financial market conditions that has occurred since May.  As we move into 2014, the fiscal headwinds should abate somewhat.  As that occurs, the improving underlying fundamentals of the economy should begin to dominate, pushing up the overall growth rate.  But this is just a forecast, it has not been realized yet.  That is one reason why I supported the FOMC’s decision last week to maintain the current pace of our Treasury and mortgage-backed security purchases.  In my view, the economy still needs the support of a very accommodative monetary policy.  Adjustments to that policy need to be anchored in an assessment of how the economy is actually performing, how financial conditions are evolving, and how this affects the longer-term outlook and the risks around it. Our decisions on how to adjust our policy tools—for example, the pace of asset purchases and forward guidance with respect to the level of short-term rates—must be rooted in the ongoing flow of information that informs our judgments about the prospects for a sustainable recovery.  Decisions on the pace of asset purchase and forward guidance must be based on what is most appropriate to achieve our dual mandate objectives of maximum sustainable employment in a context of price stability.”

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