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Fed's Dudley 'hopeful' on recovery; Plosser calls for capping QE

Jonathan Spicer and Dan Kelley
William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York speaks at the Council on Foreign Relations in New York, May 24, 2012. REUTERS/Andrew Burton

By Jonathan Spicer and Dan Kelley

NEW YORK (Reuters) - Top Federal Reserve officials from opposite sides of the policy spectrum pointed to improvement in the U.S. economy on Monday, adding more weight to the notion that the central bank is getting close to reducing the pace of its monthly asset purchases.

William Dudley, president of the Federal Reserve Bank of New York and one of the staunchest supporters of the Fed's easy-money policies, cited labor market improvements and stronger-than-expected growth in the third quarter as signs of optimism for the U.S. economic recovery.

"I have to admit that I am getting more hopeful," Dudley, a permanent voter on the Fed's policy-setting committee, told students and professors at Queens College in New York.

"Not only do we have some better data in hand, but also the fiscal drag, which has been holding the economy back, is likely to abate considerably over the next few years at the same time the fundamental underpinnings of the economy are improving."

The Fed has held interest rates near zero since 2008 and has been buying $85 billion in Treasury and mortgage bonds each month for more than a year to boost investment, hiring and growth.

In separate remarks, Philadelphia Fed President Charles Plosser, an inflation hawk and critic of Fed stimulus spending, said the central bank should set a fixed dollar amount on its bond-buying program and end the purchases when that amount is reached.

Plosser also pointed to improving economic conditions, including better-than-expected hiring, and said the Fed missed an opportunity to begin scaling back purchases in September.

"We cannot continue to play this bond-buying game by ear and risk the Fed's credibility while creating lingering uncertainty about the course of monetary policy," he said in a speech before the Risk Management Association in Philadelphia.

Plosser first broached capping the bond purchases earlier this month and spent Monday fleshing out the proposal.

U.S. GDP growth was 2.8 percent in the third quarter. In October, employers added 204,000 new jobs to their payrolls, data that suggested the economy was able to weather the 16-day government shutdown in the first half of the month.

Oil prices dropped sharply after Dudley spoke, perhaps on the view that Fed policy could start changing more quickly than expected. U.S. stocks turned lower late on Monday after scaling record highs earlier.

There has been a shift among economists and investors on views of when the Fed will begin to scale back its bond purchases following the latest data. In the latest Reuters poll, more U.S. primary dealers see the Fed beginning to taper before March, a change from two weeks earlier when a majority expected a reduction would not come before March.


While the broader Fed may be moving toward scaling back purchases, it's unclear that Plosser's position on setting a fixed amount for bond purchases will win a majority of support on the committee.

Indeed, Dudley, despite his rosier assessment, said he anticipates "very accommodative" monetary policy to be in place "for a considerable period of time" given low inflation and high unemployment in the world's biggest economy.

In response to student questions, Dudley, who is a close ally of Fed Chairman Ben Bernanke, said the Fed remains convinced the benefits of the quantitative easing program outweigh the costs, adding there are no current signs the bond-buying is leading to "disturbing" asset bubbles.

But Dudley was clearly more upbeat than the last time he publicly weighed in on the state of the economy in the wake of the 2007-2009 recession.

In late September, he said the labor market was not yet healthy and the broader recovery still needed monetary support from the Fed.

The comments come days after fellow Janet Yellen, the Fed's vice chair and President Barack Obama's nominee to succeed Bernanke, defended the Fed's bold steps to spur growth and said she would press on until she was satisfied a durable recovery was in place.

Plosser said he expected inflation to drift back toward the Fed's 2 percent target in the next year and the jobless rate, now at 7.3 percent, to end 2014 at 6.25 percent, a considerably rosier outlook than many of his Fed colleagues.

The Fed has said it would keep interest rates at record lows at least until the jobless rate hits 6.5 percent and inflation expectations are no more than 2.5 percent.

Two Fed papers published this month suggested the central bank should wait until unemployment hits 6 percent before making any changes.

Speaking to reporters after his speech, Plosser said those papers "weren't written by policymakers, they were written by staff."

He added, "Staff do lots of things that are basically ideas. It doesn't mean they will be accepted by the committee."

(Additional reporting by Martin Dokoupil and Regan Doherty; writing by Steven C. Johnson; Editing by Leslie Adler)