–But NY Fed President Says ‘Can’t Promise’ Fed Policies Will Achieve

By Claudia Hirsch

LYNDHURST, NJ (MNI) – New York Federal Reserve Bank President
William Dudley Friday said the central bank’s “extraordinary” measures
aimed at boosting the U.S. labor market recovery may not fully deliver
the desired results.

“We are doing pretty extraordinary things” Dudley said, answering
questions following an address to an economic summit hosted by the
Meadowlands Regional Chamber.

“We do think that it can lead to labor market recovery,” he said,
but added that he “can’t promise that our policies can achieve” all
goals.

“We’re disappointed by how rapidly the unemployment rate has come
down,” said Dudley, who serves on the Fed’s policymaking Open Market
Committee and so enjoys a permanent vote on the panel. “The unemployment
rate today is clearly much higher than we want it to be.

“We are going to keep at it.”

Asked what policies the Fed can implement to juice employment
before the November 2012 elections, he said, “What we do between now and
then will depend on how economic conditions evolve.”

Conditions currently are slowly improving, from “at worst, mixed”
economic data to a “gradually loosening” credit environment, he said.

He cited promising figures in July reports on industrial production
and retail sales, and also noted some thawing in banks’ “willingness to
lend.” He described a quiet comeback in both household and business
finances.

“The convalescence is certainly much slower and longer than we had
hoped for,” he said. He added that the commercial real estate market,
too, has seen some uptick in pricing and lending vs. a year ago, and
that more is expected as employment grows.

Meanwhile, heightened regulatory oversight and tightened capital
standards, he said, haven’t meaningfully crimped U.S. banks’ lending.
The effect on lending has been “de minimus,” Dudley said.

“It might have some effect on their profitability, some effect on
compensation,” he said of banks. “Of all my concerns, this (is) way down
on my list.”

Turning to the New York Fed’s oversight of foreign banks, Dudley
said the regulator routinely monitors both European and U.S. banks,
describing it as standard operating procedure. And he said that, given
recent financial market volatility, the practice is only “prudent.”

Recent market action, he said, also suggests that financial markets
are convinced the U.S. will honor its debts, “full stop,” regardless of
Standard and Poor’s recent downgrade of the nation’s sovereign debt.

“It’s important not to overstate the significance of the
downgrade,” Dudley said. “It was really more on the basis that, you
know, they haven’t seen enough yet.”

He said he’s “really convinced” the U.S. will do what it must to
achieve fiscal consolidation in the long term, but he predicted a “bumpy
ride.” For now, he said, Congress has put a “down-payment to that fiscal
consolidation” with its deal to raise the debt ceiling and cut at least
$2.4 trillion in spending over 10 years.

In his earlier prepared remarks, which echoed almost identically a
Thursday speech and another last Friday, Dudley defended the FOMC’s Aug.
9 announcement that it would likely keep the federal funds rate
“exceptionally low” for the next two years. He said that lower market
interest rates have emerged in the days since the Fed’s decision and
“should help provide some additional support for economic activity and
jobs.”

But he noted that “conditions remain unsettled and the equity
market in particular has been quite volatile recently.”

Dudley said that at the policy-setting meeting, he and his
colleagues “discussed the range of policy tools available to promote a
stronger economic recovery in a context of price stability.” The FOMC
offered no further insight on whether it might launch a third round of
quantitative easing, and Dudley has also declined to elucidate in any of
his remarks since Aug. 9.

Dudley said Friday that the panel’s statement “presents a sober
assessment” of the economy. He noted that 2011 growth has disappointed,
the promising jobs growth earlier in the year has “deteriorated” in the
last few months and unemployment has “edged up.”

He did say, however, that the U.S. economy should see stronger
growth in the second half of the year, as “temporary” factors, like
inflationary pressures and supply-chain disruptions, earlier in the year
have now “abated.”

“We’re looking for growth of about 2.5% in the second half of the
year.”

But he said that more-lasting conditions have prompted him to
downgrade his expectations for the recovery’s speed. He added that the
FOMC anticipates inflation to “settle over the coming quarters at levels
at or below those consistent with our mandate to promote full employment
and price stability.”

**Market News International New York Bureau, phone 212-669-6430**

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