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Fed still 'very far away' from economic-stimulus goals, official says

New York Fed President William Dudley says the economy is showing a 'broadening and strengthening of demand and production,' but 'a substantial pickup is needed' in job growth, and core inflation needs to rise.

March 01, 2011|By Tom Petruno, Los Angeles Times

The U.S. economy's outlook has "improved considerably," but not enough to give the Federal Reserve a good reason to pull back soon on monetary stimulus, the head of the central bank's New York branch said.

William Dudley's detailed comments may be a preview of what his boss, Fed Chairman Ben S. Bernanke, will tell Congress when he presents his semiannual report on monetary policy on Capitol Hill on Tuesday and Wednesday.

In a speech Monday in New York, Dudley said the economy was showing a "broadening and strengthening of demand and production," though he didn't mention the surprising slowdown in consumer spending in January.

Despite the pickup in economic activity compared with six months ago, the Fed still was "very far away" from achieving its dual goals of boosting employment and maintaining "price stability," Dudley said.

When he talks about price stability, he isn't signaling concern about rising inflation. Just the opposite: Dudley, like Bernanke, believes inflation is too low as measured by the Fed's preferred gauge, the so-called core personal consumption expenditures deflator.

By that measure inflation was up 0.8% in January from a year earlier, compared with the 2% annual level the Fed believes would be healthy for the economy.

Even if the Fed starts seeing "faster progress" in lifting core inflation and in job growth, that would be "very welcome and need not require an early change in the stance of monetary policy," Dudley said.

The surge in crude oil prices last week rekindled the debate over the Fed's ongoing program to pump money into the financial system via Treasury bond purchases. Some Fed officials have said it might be necessary to end the $600-billion program before its scheduled completion in June if inflation picks up.

Dudley seemed to be trying to quash that thought. Bernanke will have more to say on the subject in Senate and House hearings this week.

The government will report February employment numbers Friday. After the disappointing January report, which estimated the economy created a paltry net 36,000 jobs that month, the consensus estimate of economists surveyed by Bloomberg News is that 190,000 jobs were created in February.

Dudley said he believed there's a lot more to come.

"I do expect that payroll employment growth will increase considerably more rapidly in the coming months," he said. "A substantial pickup is needed. Even if we were to generate growth of 300,000 jobs per month, we would still likely have considerable slack in the labor market at the end of 2012."

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