“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.
Much of the decline in the jobless rate, Dudley said, is a result of workers leaving the labor force. “Job loss rates have fallen, but hiring rates remain depressed at low levels,” he said. “The labor market still cannot be regarded as healthy.”
The FOMC has said it will keep its benchmark rate close to zero as long as unemployment exceeds 6.5% and the outlook for inflation is no more than 2.5%.
“Not only will it likely take considerable time to reach the FOMC’s 6.5% unemployment rate threshold, but also the FOMC could wait considerably longer before raising short-term rates,” Dudley said. “The fact that inflation is coming in well below the FOMC’s 2% objective is relevant here. Most FOMC participants currently do not expect short-term rates to begin to rise until 2015.”
The strategy Bernanke laid out for tapering bond purchases was predicated on the economy growing in line with the FOMC’s forecasts. Central bankers expect growth of 2.3% to 2.6% this year, according to projections released last week. The economy grew at a 1.8% rate from January through March, down from a prior reading of 2.4%.
For the Fed’s outlook to be realized, gross domestic product would have to expand at about a 3.3% average annual rate in the last six months of 2013, according to calculations by economists at BNP Paribas SA in New York.