Fed's Dudley doesn’t see more efforts to buffer US from Europe

March 27 (Bloomberg) -- Federal Reserve Bank of New York President William Dudley said Europe has made significant progress to achieving steady growth and he doesn’t expect more Fed efforts to buffer the U.S. from the region’s debt crisis.

“While difficult work still lies ahead, countries in the euro area have made meaningful progress toward achieving long- term fiscal sustainability,” Dudley said today in prepared testimony to be delivered today before a House Financial Services subcommittee hearing. “I do not anticipate further efforts by the Federal Reserve to address the potential spillover effects of Europe on the United States.”

Former European Central Bank Governing Council member Axel Weber said yesterday financial institutions shouldn’t count on additional three-year loans following more than 1 trillion euros ($1.3 trillion) in two long-term refinancing operations beginning in December. Italian Prime Minister Mario Monti warned that Spain may reignite the debt crisis, while Portugal bond yields are at levels suggesting traders expect another bailout.

“If economic conditions in Europe were to weaken significantly, demand for U.S. exports would decrease,” Dudley said. “This would hurt domestic growth and have a negative impact on U.S. jobs,” he said.

Financial deterioration in Europe could put pressure on the U.S. banking system, harm capital and liquidity buffers and impair the flow of credit to households and businesses, he said.

Dudley also said it is in the U.S. national interest to ensure U.S. banks have access to U.S. dollar funding and swaps should create a credible backstop not supplement private markets.

Crisis Hurt Economy

Dudley testified along with Steven Kamin, the director of international finance at the Fed’s Board of Governors in Washington, who said the European debt crisis has already hurt the U.S. economy.

“The financial stresses in Europe have undoubtedly spilled over to the United States by restraining our exports, weighing on business and consumer confidence, and adding to pressures on U.S. financial markets and institutions,” Kamin said.

“Strains have eased somewhat of late,” although further “disruptions” may harm the U.S., said Kamin, who is one of the three top Board of Governors staff officials who brief the Fed’s Open Market Committee on interest rates and economic developments.

“Although the breadth and size of all of these effects on the U.S. economy are difficult to gauge, it is clear that the situation in Europe poses a significant risk to U.S. economic activity and bears close watching,” Kamin said.

Dudley said the U.S. economy is “ expanding at a moderate pace, and strains in global financial markets, although having eased recently, continue to pose significant downside risks to the economic outlook.”

Bloomberg News

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