Speaking at Syracuse University on Friday, NY Fed President William Dudley let it be known he is still seeing mixed signals from the economic data. A lot of the recent data, he says, is promising. Household net worth has increased. Banks have loosened credit lines. Consumer spending is up. Home prices are rising and excess supply of housing is lessening. However, a number of risks to the outlook are evident. Long-term interest rates, including mortgage rates, have risen significantly since early May. Since then, we have seen a sharp drop in refinancing mortgage applications, a more moderate but significant decline in purchase mortgage applications and fairly flat housing starts and new home sales. Although I do not anticipate that the rise in long-term rates will lead to a downturn in housing, these developments do suggest that higher mortgage rates have cut into the upward momentum of the housing sector. We will need to monitor upcoming data closely to assess more fully the impact of higher rates on the housing recovery. Another risk is that federal fiscal policy could exert further restraint on the economy during the rest of this year and in 2014. It is difficult to assess how much of the contractionary effects from sequestration, for example, have already occurred, or still remain ahead. A related issue is the high degree of uncertainty about fiscal policy. In coming weeks, Congress will be considering how to fund the government for the next fiscal year and will also be debating what to do about the debt limit. This creates uncertainty about the fiscal outlook and may exert a restraining influence on household and business spending. One other risk to highlight is the global economic outlook. Even though the euro area appears to have begun to grow again after a protracted recession, growth in that area is still expected to be fairly weak at best. In addition, growth in many of the largest emerging economies has slowed, and some of the countries with large trade and current account imbalances have seen their financial markets and currencies come under pressure. If growth abroad were to slow, this could impede the growth of U.S. exports and this could result in less strength in manufacturing production and employment in the U.S. Thus, returning to an analogy I have used in previous speeches, I see the economy in a tug-of-war between these headwinds and underlying fundamental improvement, with a great deal of uncertainty over when the improvement in the underlying fundamentals will prevail. In the end, my best guess is that growth for all of 2013, measured on a Q4/Q4 basis, will be near the post-recession average. But I believe a good case can be made that the pace of growth will pick up some in 2014. The private sector of the economy should continue to heal, while the amount of fiscal drag should subside. I also expect that, despite the near-term concerns, growth prospects among our major trading partners will improve next year. And this combination of events is likely to create an environment in which business investment spending will strengthen. However, the notion that the economy will grow more swiftly remains a forecast rather than a reality at this point. Read the full speech here .
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