NY FED'S DUDLEY: The Taper 'Depends On The Outlook Rather Than The Calendar'

william dudley federal reserveNew York Fed president William Dudley addresses the Association for a Better New York in New York, July 29, 2009.

Everyone’s crazy about Federal Reserve officials speaking, especially in the wake of Chairman Bernanke’s suggestion that the Fed could soon taper its quantitative easing program.

NY Fed President William Dudley is speaking in Stamford, CT today, and his prepared remarks just crossed the wires.

There’s not much new here.  Dudley just reiterates Bernanke and the rest of the Fed, saying that he expects the U.S. economy to pick up in 2014. 

He also emphasised the importance of economic data as it relates to the taper.

He also noted that tapering is not the same thing as tightening.

Here’s the part of the speech where he addresses the taper (emphasis added):

As Chairman Bernanke stated in his press conference following the FOMC meeting, if the economic data over the next year turn out to be broadly consistent with the outlooks that the FOMC sees as most likely, which are roughly similar to the outlook I have already laid out, the FOMC anticipates that it would be appropriate to begin to moderate the pace of purchases later this year.  Under such a scenario, subsequent reductions might occur in measured steps through the first half of next year, and an end to purchases around mid-2014.  Under this scenario, at the time that asset purchases came to an end, the unemployment rate likely would be near 7 per cent and the economy’s momentum strengthening, supporting further robust job gains in the future. 

As I noted last week in our regional press briefing, a few points deserve emphasis.   First, the FOMC’s policy depends on the progress we make towards our objectives.  This means that the policy—including the pace of asset purchases—depends on the outlook rather than the calendar.  The scenario I outlined above is only that—one possible outcome.  Economic circumstances could diverge significantly from the FOMC’s expectations.  If labour market conditions and the economy’s growth momentum were to be less favourable than in the FOMC’s outlook—and this is what has happened in recent years—I would expect that the asset purchases would continue at a higher pace for longer.   

Second, even if this scenario were to occur and the pace of purchases were reduced, it would still be the case that as long as the FOMC continues its asset purchases it is adding monetary policy accommodation, not tightening monetary policy.  As the FOMC adds to its stock of securities, this should continue to put downward pressure on longer-term interest rates, making monetary policy more accommodative. 

Third, the Federal Reserve is likely to keep most of these assets on its balance sheet for a long time.  As Chairman Bernanke noted in his most recent press conference, a strong majority of FOMC participants no longer favour selling agency MBS securities during the monetary policy normalization process.  This implies a bigger balance sheet for longer, which provides additional accommodation today and continuing support for mortgage markets going forward. 

Fourth, even under this scenario, a rise in short-term rates is very likely to be a long way off.  Not only will it likely take considerable time to reach the FOMC’s 6.5 per cent unemployment rate threshold, but also the FOMC could wait considerably longer before raising short-term rates.  The fact that inflation is coming in well below the FOMC’s 2 per cent objective is relevant here.  Most FOMC participants currently do not expect short-term rates to begin to rise until 2015. 

To reiterate what I said last week, some commentators have interpreted the recent shift in the market-implied path of short-term interest rates as indicating that market participants now expect the first increases in the federal funds rate target to come much earlier than previously thought.  Setting aside whether this is the correct interpretation of recent price moves, let me emphasise that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants.

Read the whole speech at NYFed.org.

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