Reuters: Regulatory News: UPDATE 3-Fed's Dudley says for now, more easing not needed

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UPDATE 3-Fed's Dudley says for now, more easing not needed May 24th 2012, 20:54 Thu May 24, 2012 4:54pm EDT * Economic growth needs to continue to hold steady on policy * Dudley more optimistic, but cannot rule out more easing * Policymaker mum on letting Operation Twist expire in June * On JPMorgan, Dudley says Fed not meant to prevent mistakes By Jonathan Spicer NEW YORK, May 24 (Reuters) - Further action by the Federal Reserve to stimulate the U.S. recovery is not warranted for now because current growth is making a dent in "slack" in the economy, including in the labor market, the influential head of the New York Fed said on Thursday. William Dudley, president of the New York Fed, who is closely aligned with Fed Chairman Ben Bernanke, expressed more confidence that the U.S. economic recovery will hold course. He even sketched out what could lead the central bank to tighten its ultra-easy stance of low rates and a big balance sheet. Still, the Fed cannot rule out taking additional steps to help along the tepid recovery - including another round of quantitative easing - if the economy were to take a turn for the worse, he said. "As long as the U.S. economy continues to grow sufficiently fast to cut into the nation's unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs," Dudley, who is a permanent voter on Fed policy, told the Council of Foreign Relations in New York. "But if the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing," he said. The Fed has held interest rates near zero since late 2008 and has bought $2.3 trillion in bonds and mortgage-backed securities to drive borrowing costs lower and spur the recovery. Dudley and Bernanke have defended the Fed's aggressive policies since the financial crisis, arguing the economy needs to grow more quickly to lower unemployment, which remains high at 8.1 percent. The many Americans still looking for work, and even those who have given up the search, are part of what economists call "slack" that works to put downward pressure on inflation, especially on wages. The labor market participation rate, a measure of the number of Americans who are currently employed or actively seeking employment, is at a 30-year low. "If we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it's hard to argue that we absolutely must do something more in terms of the monetary policy front," Dudley said earlier on CNBC. TWIST AGAIN? The Fed now holds nearly $3 trillion in securities. It has been lengthening the duration of some of those securities in an effort dubbed "Operation Twist," which aims to exert more downward pressure on long-term interest rates. Dudley, a policy dove who has long stressed the Fed is ready to take additional action if need be, said he is undecided about whether Operation Twist should be allowed to expire as scheduled at the end of June, saying he wanted to keep an open mind ahead of the Fed's next policy meeting, on June 19-20. "I wouldn't prejudge whether we're done or whether we're going to need to do more. It depends on what happens in the economy," he said. If more easing is needed, Dudley said options include a third round of purchases of either bonds or mortgage-backed securities, measures known as quantitative easing, as well as another form of "Twist." "Conversely, I would be willing to consider tightening policy at a somewhat earlier stage if growth strengthened sufficiently to materially improve the medium-term outlook and substantially reduce tail risks, or if there was evidence of a genuine threat to medium-term inflation, including a rise in inflation expectations," Dudley said. In that case, the Fed's most effective first step would be to bring forward the date of a forecast it gave last month, when the central bank repeated that it expected to keep interest rates exceptionally low at least through late 2014, Dudley said. Dudley said he currently stands by that date. CONTINGENCIES Central bank officials have suggested the economy would need to deteriorate from forecasts and inflation would need to remain near or below a 2 percent target for them to consider more stimulus in the form of bond purchases. That leaves the Fed in wait-and-see mode, and markets have proven ready to react to any hint of what's to come. Bernanke could shed more light on what's to come on June 7, when he testifies before the congressional Joint Economic Committee in Washington. For now, though, those in Bernanke's core of policymakers are giving only contingencies for policy action. Dudley said the Fed might need to act if the recovery came under threat from Europe's debt crisis or a potentially sharp tightening of U.S. fiscal policy at the end of the year - known as the "fiscal cliff." "If employment gains were to falter, if inflation were to turn down - if downside risks from, say, Europe or the U.S. fiscal cliff were to really intensify, then I think you'd absolutely have to consider further monetary policy moves," he said. Dudley also spoke about JPMorgan Chase & Co's massive losses on derivatives. He said the Fed's supervision division would "look at it very closely to see exactly what's happened there." He countered criticism of the Fed's performance overseeing major financial institutions, emphasizing the central bank's role is to ensure banks have enough capital to withstand stresses in the financial system. "Supervision is about ensuring that banks have sufficient capital and liquidity to handle large shocks. It's about ensuring that they have appropriate governance, controls and risk management systems in place," Dudley said. "It's not to prevent the banks from making mistakes, in any dimension." Link this Share this Digg this Email Reprints

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