Dudley says QE may be prolonged if economy misses forecasts

Federal Reserve Bank of New York President William C. Dudley (Source: Bloomberg)

Federal Reserve Bank of New York President William C. Dudley said the central bank may prolong its asset-purchase program if the economy’s performance fails to meet the Fed’s forecasts.

“If labor market conditions and the economy’s growth momentum were to be less favorable than in the FOMC’s outlook -- and this is what has happened in recent years -- I would expect that the asset purchases would continue at a higher pace for longer,” Dudley said in remarks prepared for delivery today in New York. He serves as vice chairman of the Federal Open Market Committee and has never dissented from a monetary policy decision.

Dudley also said any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” The economy may also diverge from the Fed’s forecasts, he said.

Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note to as high as 2.61% this week from as low as 1.63% in May. Dudley joined other Fed policy makers this week in seeking to damp expectations that an increase in the benchmark interest rate will come sooner than previously forecast.

“Let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants,” said Dudley, 60, a former chief U.S. economist for Goldman Sachs Group Inc.

Stocks Rise

Stocks extended gains after Dudley’s comments, with the Standard & Poor’s 500 Index climbing 1% to 1,619.80 at 10:41 a.m. in New York. The yield on the 10-year Treasury note fell to 2.51% from 2.54% late yesterday.

Reports today showed that consumer spending rebounded in May following the largest drop in more than three years, first- time claims for unemployment benefits fell last week and a gauge of consumer confidence climbed to the highest level since January 2008.

Dudley repeated Fed Chairman Ben S. Bernanke’s plan for a reduction in the pace of bond purchases should the economy perform as the Fed expects. He said the Fed may start to pare the current $85 billion monthly pace later this year and end the program around mid-2014.

Dudley spoke a day after a Commerce Department report showed first-quarter growth in the U.S. was less than forecast as a payroll tax increase reduced consumer spending.