Federal Reserve Bank of New York President William C. Dudley said the central bank failed to meet its mandate for stable prices and maximum employment after the U.S. economic rebound fell short of projections.
Even after the Fed’s “aggressive shift” toward greater accommodation in 2008 and 2009 and easing that helped spur growth and support housing, the economic recovery has been “consistently weaker than forecast,” Dudley said yesterday in Basel, Switzerland, according to the text of a speech posted today on the New York Fed’s website.
“The Federal Reserve has fallen short of meeting its employment and inflation objectives,” Dudley said. “This suggests that with the benefit of hindsight, U.S. monetary policy, though aggressive by historic standards, was not sufficiently accommodative relative to the state of the economy.”
The Federal Open Market Committee last week voted to press on with $85 billion in monthly bond purchases aimed at spurring growth and bringing down 7.6 percent unemployment. The jobless rate has been 7.5 percent or higher for more than four years even after the central bank reduced the main interest rate near zero in December 2008.
Chairman Ben S. Bernanke said in a press conference after the FOMC meeting on June 19 that the Fed may start tapering its bond buying later this year and halt it around mid-2014 if the economy achieves sustainable growth the central bank has sought since the recession ended in 2009.
Stocks and bonds tumbled worldwide after Bernanke’s decision. The Standard & Poor’s 500 Index slumped 1.3 percent to 1,571.31 as of 10:57 a.m in New York, extending its loss since June 18 to about 5 percent. The yield on the 10-year Treasury rose 0.08 percentage point to 2.61 percent.
Dudley also said financial stability is a “necessary condition” for monetary policy to effectively achieve its goals. “The biggest lesson of the financial crisis has been that monetary policy cannot work properly when there is financial instability,” Dudley said at the Bank for International Settlements 2013 annual general meeting.
“Financial instability can impair the linkage between monetary policy and financial conditions,” Dudley said. “The central bank may move to a much more accommodative monetary policy stance, but this may not lead to much improvement in financial conditions.”
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