Bloomberg News

Fed’s Dudley Sees Economy Recovering From ‘Soft Patch’

June 10, 2011

(Updates with Dudley saying Fed is watching inflation expectations very closely in 11th paragraph.)

June 10 (Bloomberg) -- Federal Reserve Bank of New York President William C. Dudley said he expects “disappointing” economic growth to improve, even as “downside risks” such as higher commodity prices have increased.

“I anticipate that economic growth will pick up enough in the second half of 2011 to sustain a moderate economic recovery,” Dudley, 58, said today in a speech in Brooklyn, New York. “Despite the recent soft patch, economic conditions have improved in the past year.”

The economy will probably recover from recent weakness in part because a surge in commodity prices, the earthquake in Japan and “severe weather” in the U.S. are transitory, Dudley said. The nation’s economy will also be buoyed by an improvement in financial conditions, demand for exports and a labor market that “appears more solid than it was a year ago,” he said.

A stretch of disappointing economic data on the U.S. economy, including a rise in the unemployment rate to 9.1 percent in May, have increased the odds the Fed will keep its benchmark interest rate near zero into next year. Fed Chairman Ben S. Bernanke said this week that “accommodative monetary policies are still needed” to boost a “frustratingly slow” economic recovery.

While Dudley said he expects “a moderate economic recovery to be sustained,” he also said “the recent disappointing data suggest that downside risks to the outlook have increased.”

More Strain

The rise in commodity prices has “further strained” household spending, and the “renewed decline in home prices could dampen consumer spending and housing activity more than I expect,” he said. Fiscal consolidation may also slow economic growth in the “short- to medium-term,” he said.

“Although these issues bear watching, I still believe they remain risks rather than the most likely outcomes,” Dudley said.

Bernanke and the Federal Open Market Committee plan this month to complete a $600 billion bond purchase program, and the minutes of their April meeting showed central bankers have been discussing the tools they’d use to remove stimulus. Bernanke said on June 7 that the Fed will “take whatever actions are necessary to keep inflation well controlled” and that the central bank must be “vigilant in preserving its hard-won credibility for maintaining price stability.”

‘Desired Levels’

Dudley said that headline inflation has “risen somewhat above desired levels” and is likely to continue to climb “in coming months” because of the rise in commodity prices. The increase in food and oil costs “has not spilled over much” to other areas, and “most measures of underlying inflation trends” are “below levels consistent with our mandate for price stability,” Dudley said.

The personal consumption expenditures price index, minus food and energy, rose 1 percent for the 12 months ending April. That’s below the longer-run inflation goal of 1.7 percent to 2 percent for the PCE index forecast by policy makers in April.

The Fed is “still watching inflation expectations very closely” and at present they are “generally stable,” Dudley said in response to audience questions. Inflation expectations “were getting to levels that were starting to concern us,” and have “reversed course and come down a bit,” he said. The decline reflected the decrease in commodity prices, Dudley said.

Slowest Pace

Payrolls grew at the slowest pace in eight months in May, and the unemployment rate unexpectedly climbed to 9.1 percent from 9 percent in April, Labor Department figures released on June 3 showed. The 54,000 rise in jobs followed a 232,000 gain in April and was below the 165,000 median increase forecast by economists in a Bloomberg News survey.

The jobs numbers followed a series of economic statistics suggesting that the economy is decelerating. Manufacturing grew at its slowest pace in more than in year in May, according to Institute for Supply Management data released last week. Consumer spending, which accounts for 70 percent of the economy, rose less than forecast in April as households felt the pinch of grocery and energy costs, a Commerce Department report showed.

“I expect a moderate recovery to continue,” Dudley said. “However, we still have a considerable way to go to meet the Fed’s dual mandate of full employment and price stability.”

--Editors: James Tyson, Kevin Costelloe

To contact the reporters on this story: Caroline Salas Gage in New York at

To contact the editor responsible for this story: Christopher Wellisz

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