Wednesday, May 21, 2014

Tim Duy Analyzes Speech By The President of The Federal Reserve Bank Of New York

Tim Duy (via Mark Thoma) provides his analysis of a speech by William Dudley who is the President of the Federal Reserve Bank Of New York.  The analysis includes Dudley's economic outlook and his views on how the Fed will respond to economic events.  Dudley forecasts moderate economic growth well below what typically occurs as recessions unwind.  Moreover, his forecast is tempered with cautions because of uncertainties about the growth rate.  Our recoveries from previous recessions have usually been led by growth in the housing market.  Dudley describes several of the headwinds that may keep the housing market from accelerating.  He also expects that productivity growth will be slower than usual, and that the labor force growth rate will also be slow.  Therefore, potential GDP will be lower than it has been in the past. 

Given the uncertainties in the economic outlook, Fed policies are also uncertain.  Dudley does his best to describe how the Fed will respond to changes in the economic outlook.  Tim Duy makes an effort to decipher Dudley's remarks, and it is clear that the Fed will stick to its dual mandate.  The Fed is mandated to maintain employment and price stability.  It has two tools at its disposal, asset purchases and interest rates. It will use a combination of both as events unfold.  It would appear that interest rates will not accelerate in the near future but that asset purchases will taper. 

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