NY Fed President Sees Slow Recovery, Low Inflation Risk

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A slow U.S. economic recovery should mean little fear of inflation for the foreseeable future, according to New York Federal Reserve Bank President William Dudley.

Speaking Monday at the Fordham Corporate Law Center in New York, Dudley said in remarks prepared for delivery that the recovery "will turn out to be moderate by historical standards, adding that a slow recovery means the Fed will be able to maintain its record-low interest rate for an "extended period."

On a day when Goldman Sachs issued an upgraded rating for the nation's major banks, Dudley added that "The Banking system still has not fully recovered."

Dudley noted that the nation's jobless rate continues to be a concern.

"The unemployment rate is much too high. This means the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next two years.

The NY Fed Chief added that Fed policy makers are ready and able to react to signs of growing inflation.

"I want to assure you that the Fed has the tools to tighten monetary policy regardless the size of its balance sheet. Moreover, we have the will to do so in order to keep inflation in check."

The Fed has left its benchmark interest rate at a range of from zero to 0.25 percent.

Dudley noted that the partial recovery in the financial sector has led to a general improvement in both business and consumer sentiment, which has spurred the overall economy.

"The vicious cycle we had a year ago-in which the deterioration in financial markets led to economic weakness and that weakness reinforced the tightening of financial conditions-has been broken. In fact, to some extent, it has been replaced with a virtuous cycle."

Dudley warned that risks remain for a banking sector that has still not fully recovered.

"Bank credit losses lag the business cycle and are still climbing. Thus, while banks' access to the capital markets has sharply improved, banks are still capital constrained and hesitant to expand their lending. Most importantly, some significant classes of borrowers-namely commercial real estate and small business-are almost wholly dependent on the banking sector for funds, and those funds are not easily forthcoming."

(Market News Provided by RTTNews)