Bloomberg: Fed’s Dudley Says U.S. Economic Performance ‘Mixed,’ Banks in Better Shape

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Fed’s Dudley Says U.S. Economic Performance ‘Mixed,’ Banks in Better Shape
By Caroline Salas Gage - Aug 19, 2011 06:42 AM

Federal Reserve Bank of New York President William C. Dudley said U.S. economic performance is “at worst, mixed,” with negative news offset by loosening credit, firmer retail sales and stronger bank balance sheets.

Banks are “in much better shape” than a year ago, with “huge liquidity buffers compared to where they were in 2008,” Dudley said today in response to an audience question after a speech in Lyndhurst, New Jersey. Real-estate financing is “a little more available today than” 12 months ago.

The policy-setting Federal Open Market Committee on Aug. 9 pledged to keep its benchmark interest rate near zero until at least mid-2013 to revive an economic recovery that’s “considerably slower” than anticipated. Fed officials also “discussed the range of policy tools” available to boost growth and are “prepared to employ those tools as appropriate,” the FOMC said.

Dudley said in a speech that he expects growth to accelerate in the second half of the year as the impact of “temporary factors” such as the earthquake in Japan and higher commodity prices subsides.

“These restraining forces have abated and thus, we should see stronger growth in the second half,” Dudley, 58, said in Lyndhurst, New Jersey. “But it is clear that not all of the weakness was due to these one-time factors -- and in light of this, I have revised down my expectations for the pace of recovery going forward.”

His remarks were similar to those given in Newark, New Jersey, yesterday, and in New York last week.

Biggest Two-Day Loss

Global stocks slid, dragging European shares to the biggest two-day loss since 2009, amid growing concern the economic recovery is faltering. The Standard & Poor’s 500 Index declined 0.2 percent at 10:13 a.m. in New York, extending a fourth straight weekly slump.

The Stoxx Europe 600 Index slipped 1.1 percent after falling 4.8 percent yesterday.
More than $6 trillion has been erased from global equities this month on signs the U.S. recovery is stumbling, while the cost of insuring European sovereign debt is back to levels that triggered the region’s central bank to buy Italian and Spanish bonds on Aug. 8.

“Following the release of the FOMC’s statement, market interest rates generally removed lower, which should help provide some additional support for economic activity and jobs,” Dudley said. “I would note, however, that conditions remain unsettled and the equity market in particular has been quite volatile recently.”

He reiterated that policy makers gave a “sober assessment” of the outlook and that he has cut his forecast for growth. He didn’t quantify his new forecast.
Rate Pledge

The Fed made the rate pledge after Standard & Poor’s downgraded the U.S. government’s credit rating and Europe’s debt crisis worsened, roiling markets worldwide. The S&P 500 Index of stocks tumbled 18 percent from the end of April through Aug. 8.

While the FOMC didn’t specify which tools it’s considering using, Chairman Ben S.
Bernanke said in July that if the recovery weakens, the Fed may weigh beginning a third round of bond purchases or pledge to keep its balance sheet at a record high for a longer period of time. The Fed purchased $1.7 trillion of Treasury and mortgage debt from December 2008 to March 2010, and another $600 billion of Treasuries from November through June.

The economy grew at a weaker-than-projected 1.3 percent annual rate in the second quarter, a July 29 government report said. Growth in the prior quarter slowed to a 0.4 percent pace, the weakest three-month period since the recovery began in June 2009.

The Fed is “committed” to controlling inflation and “well-anchored” inflation expectations indicate that Americans believe the central bank will do so, Dudley said in response to an audience question.

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net