William Dudley, President of the Federal Bank of New York, spoke earlier today at New York University's Stern School of Business, and he gave a measured, somewhat positive prognosis of the US economy. While he said that there are mixed signals coming from the employment data, there is some good news in the data on consumer spending, productivity, and consumer and business confidence.
On the activity side, a wide range of indicators show a broadening and strengthening of demand and production. For example, on the demand side, real personal consumption expenditures rose at a 4.1 percent annual rate during the fourth quarter. This compares with only a 2.2 percent annual rate during the first three quarters of 2010.
Orders and production are following suit. For example, the Institute of
Supply Management index of new orders for manufacturers climbed to 67.8
in January, the highest level since January of 2004.
The revival in activity, in turn, has been accompanied by improving
consumer and business confidence. For example, the University of
Michigan consumer sentiment index rose to 77.5 in February, up from 68.9
six months earlier.
Indeed, the 2.8 percent annualized growth rate of real gross domestic
product (GDP) in the fourth quarter may understate the economy's forward
momentum. That is because real GDP growth in the quarter was held back
by a sharp slowing in the pace of inventory accumulation. The revival in
demand, production and confidence strongly suggests that we may be much
closer to establishing a virtuous circle in which rising demand
generates more rapid income and employment growth, which in turn
bolsters confidence and leads to further increases in spending. The only
major missing piece of the puzzle is the absence of strong payroll
employment growth. We will need to see sustained strong employment
growth in order to be certain that this virtuous circle has become
So, there's the good news. But Dudley was careful to caution against premature optimism. And he while he outlined the dangers of low-interest rates, and the chance they might "foster a buildup of financial excesses or bubbles that might pose a medium-term risk to both full employment and price stability," he also explained that the Fed does have tools to avert crisis:
To summarize the main points, we have a considerable amount of slack, little evidence of discontinuous speed limit effects, and little inflation pass-through from commodities into core inflation when inflation expectations are well-anchored, which is currently the case. This suggests that the biggest risk in terms of higher underlying inflation over the next year or two is that inflation expectations could become unanchored. This might occur, for example, if there were a loss of confidence in the ability and/or willingness of the Federal Reserve to tighten monetary policy in a timely way in order to keep inflation in check.
In this regard, the proof of the pudding will be in our actions—talk is cheap. What is key—that the appropriate policy steps are taken in a timely manner.
Read Dudley's Prospects for the Economy and Monetary Policy here.
Filed under: Federal Reserve, interest rates, monetary policy, consumer spending, consumer confidence, optimism, inflation, Economic Outlook, productivity, William Dudley, fed policy, federal reserve bank of new york, ny fed, consumer optimisim