Fed's Dudley warns of over-optimism, counters hawks
One of the Federal Reserve's most powerful policy makers pushed back against an increasingly hawkish tone from other Fed officials worried about inflation, saying he saw no need for the U.S. central bank to reverse course.
William Dudley, president of the New York Federal Reserve Bank, said on Friday the Fed was still very far away from achieving its mandate of maximum sustainable employment and price stability, even though the economy is on a firmer footing.
His caution contrasted with comments from three other Fed officials on Friday who focused on the risks that the U.S. central bank's policies could fuel inflation.
Earlier on Friday, upbeat jobs data underscored how the U.S. labor market was on the mend. But Dudley's comments prompted prices for safe-haven U.S. Treasury bonds to erase modest losses and drove the dollar down against the euro.
The March employment figures had initially driven expectations that the Fed might end its easy monetary policy sooner than expected.
A stronger recovery with more rapid progress toward our dual mandate objectives is what we have been seeking, Dudley told a conference in San Juan, Puerto Rico. This is welcome and not a reason to reverse course.
The president of the New York Fed has a permanent voting seat on the Fed's policy-setting panel, unlike other regional Fed officials who hold voting seats on a rotating basis.
The Fed has kept interest rates near zero since December 2008 and launched a $600 billion bond-purchase program in November to further support the U.S. economic recovery.
At its last meeting, the Fed unanimously voted to stick to the bond purchase program which is due to end in June.
The Fed's upcoming policy meeting on April 26-67 is its last scheduled meeting before the bond-purchase program is scheduled to end.
Dudley told reporters he would be surprised if the program was not completed but said the benefits of further round of so-called quantitative easing had diminished a bit.
The president of the Philadelphia Fed, Charles Plosser, and Richmond Fed President Jeffrey Lacker, both considered inflation hawks, said the Fed could raise interest rates in 2011, depending on how the economic recovery evolves.
It wouldn't surprise me if we needed to act before the end of the year, Lacker told CNBC television, adding that inflation is a bigger risk to the economy this year than it was in 2010.
Lacker said he had not yet made up his mind on whether he thinks the Fed should stop short of the full $600 billion of its bond-buying program.
Richard Fisher, the president of the Dallas Federal Reserve, also took a hawkish tone in comments on Friday, warning that rising inflation around the world might start to push up wages in Europe and the United States.
However, Minneapolis Fed President Narayana Kocherlakota said that a sufficiently tough central bank can control inflation even if fiscal policy is so loose that it risks a sovereign default.
Most leading economists do not expect the Fed to increase interest rates this year, a Reuters poll found on Friday. For details on poll see
DIFFERENCES IN OUTLOOKS
The diverging comments highlight increasing differences between Fed officials on the outlook for the U.S. economy and inflation. Dudley sought to downplay the differences, saying all Fed officials agreed on policy goals.
The head of the New York Fed, whose recent comments put him on the dovish end of the Fed's policy spectrum, is influential vice chair of the Fed's policy-setting committee, as well as holding a permanent voting seat on the Fed's policy-setting panel.
Plosser, Lacker and Kocherlakota have a vote on policy this year, while Fisher does not.
Acknowledging some hopeful signs in the economy, Dudley said it was important not to be overly optimistic about growth. He cautioned that progress could be slowed by the effects of Japan's devastating earthquake and tsunami and from high oil prices, which have been pushed up recently by unrest in the Middle East and North Africa.
Figures showing a second straight month of solid jobs gains in March were good news, he said.
But the Fed would need to see sustained strong employment growth to be sure that a virtuous circle -- in which rising demand generates more rapid income and employment growth and leads to more consumer spending -- was firmly established.
The U.S. government reported a gain of 216,000 jobs in March and also reported a decline in the jobless rate to a two-year low of 8.8 percent.
Dudley said he was hopeful that jobs growth will increase more rapidly in the coming months but even if the economy adds 300,000 jobs per month, there would still likely be considerable slack in the labor market at the end of 2012.
(Reporting by Kristina Cooke in San Juan, Edith Honan in Harrisburg, Mark Felsenthal in Dallas and Corbett Daly and Glenn Somerville in Washington; Editing by Leslie Adler)
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