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Fed Easing Is Not Aimed at Weakening US Dollar: Dudley
ECONOMY, FED, POLITICS, INTEREST RATES, QE, US, FEDERAL RESERVE, CENTRAL BANK, MONETARY POLICY, US DOLLAR, CURRENCIES, BILL DUDLEY, EMPLOYMENT, INFLATION, INTEREST RATES, G20,
Posted By: Steve Liesman | Senior Economics Reporter
CNBC.com
| 16 Nov 2010 | 12:15 AM ET
New York Fed President Bill Dudley, in one of the first Fed interviews since the central bank's
policy came under attack at the G20 meetings in Seoul, said critics were "off base" to believe the aim of the policy is to weaken the U.S. dollar.
Dudley, in a CNBC interview, directly responded to
comments from the German Finance Minister ahead of the G20 meeting last week that the U.S. central bank was working to "artificially lower the value of the dollar."
"I think that's very off base because I think that the goal of our policy is a very simple one, to ease financial conditions," Dudley said. The Fed is "
not trying to push the dollar to any particular level. What we're trying to do through our large-scale asset purchase programs is to remove Treasurys from the market and force private investors into other assets."
As president of the New York Federal Reserve, Dudley is unique among the 12 district bank presidents because he has a permanent vote on the rate-setting Federal Open Market Committee. Other bank presidents rotate into voting slots. The NY Fed President also serves as vice chairman of the committee, and his views are usually closely aligned with the Fed Chairman.
Dudley conceded that the Fed could have done a better job communicating the reasons for its
decision to purchase $600 billion in Treasurys and went on to address some of the most-widespread criticisms of Fed policy.
He said that he agreed with the one critique: that the asset purchases would not have "a huge powerful effect on the U.S. economy."
"But even a little bit of nudge to the economy today I think is very, very important because if the economy can grow a little bit faster, that gives you a much better prospect about being in a virtuous circle: a little bit stronger growth leads to a little bit more demand. A little bit more demand leads to more employment growth, higher income and rising confidence...
rather than on the other side of things where we've seen Japan over the last 15 or 20 years."
Dudley said a key reason for the new policy was to avoid a "double-dip" recession. "I think there is a fair amount of empirical evidence that suggests that there is a stall speed for the economy," he said.
Many economists forecast below potential growth for several years, which could mean a continued rise in
unemployment. Dudley said that every time the unemployment has risen by three-tenths of a percent in the post-War era, the economy has ended up in recession.
"So that does suggest that that once you get to a certain point, and unemployment rate goes up enough, that starts to weigh on confidence, that starts to weigh on spending. If spending is cut back, that leads to more unemployment, and the economy cycles down into recession," he said.
As for the dollar , Dudley said that a currency usually depreciates when one nation eases monetary policy relative to another, but he said that's not always the case. He even held out the possibility that quantitative easing could cause the dollar to appreciate, which it has over the past several weeks. "If people look at our policy as making it more likely that the U.S. economy is going to recover, the dollar could appreciate rather than depreciate," he said.
He also disagreed with another point of criticism: that the Fed's policy would lead to
inflation. Dudley contended that new tools the Fed has put in place to withdraw excess cash from the banking system when the economy rebounds would head off inflation, including paying higher interest rates on the excess reserves banks are now holding. "We are very confident of our ability to exit when the time comes, in terms of the tools. We also are very confident of our will to exit," Dudley said.
Dudley rejected outright the idea put forward by some economists that the Fed should aim for a higher inflation rate than the current target of around 2 percent.
Traditionally, the New York Fed President is among the least outspoken of Fed bank presidents. Dudley has made himself more accessible than his predecessors. Still, such interviews are rare and it's clearly a measure of the Fed's concern with the foreign and domestic criticism of its policy that Dudley has chosen this moment to go public.
Dudley, a former Goldman Sachs economist, also rejected the widely held view that the Fed is really printing money. "What we're doing is, when we buy Treasury securities, we are increasing the amount of reserves in the banking system. For those reserves to actually create money, the banks actually have to lend those reserves out.
The problem with the U.S. economy now is that there is insufficient lending and he doesn't expect the Fed's purchase program to solve that problem because there are ample reserves in the system. He expects the current program to help the economy by lowering interest rates for businesses and consumers.
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Click here to see full transcript © 2010 CNBC.com
