NY Fed’s Dudley: Just Wait ‘til Next Year

In a speech today in Connecticut, Dudley said that he believes “that the pace of growth will pick up notably in 2014,” from the rather anemic average growth over the past 15 quarters of 2.1%. Dudley did not pin a number on his projection, but he pointed to a pick up in spending on durable goods, an end to the overhang in the supply of housing, and anecdotal evidence of rising home prices as positive signals.

On the negative side, federal fiscal policy (aka, the sequester) “has recently become quite contractionary,” and Dudley cites the Congressional Budget Office that fiscal restraint is likely to shave off 1.75 points of GDP growth in 2013. The eurozone recession and the slowing growth in some of the largest emerging economies have cut U.S. exports, hurting employment growth especially in manufacturing. He noted that job growth has been reasonably steady at about 175,000 a month for the past two months, but that federal jobs and manufacturing jobs have combined to drop 20,000 jobs a month.

In 2014, Dudley thinks that “the private sector of the economy should continue to heal, while the amount of fiscal drag will begin to subside.” Inflation is low with some exceptions and that prices for core goods will “begin to firm” as demand improves and inventories are aligned better to sales.

As for the wind-down of the Fed’s asset purchases, Dudley said:

[R]eductions might occur in measured steps through the first half of next year and an end to purchases [could come] around mid-2014. Under this scenario,at the time that asset purchases come to an end, the unemployment rate likely would be near 7 percent and the economy’s momentum strengthening, supporting further robust job gains in the future.

He noted, though, that Fed policy “depends on the outlook rather than the calendar.” That’s the salient point that Dudley and other Fed officials who support the current accommodative policy have been trying to make ever since last month’s stock sell-off. Everyone probably gets it by now, so maybe there won’t be any reason for more speeches like this until after the September FOMC meeting.