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New York Federal Reserve President William Dudley said on Friday that the recovering U.S. economy should expand at a lower growth rate than the expansion during the second half of 2009.
Speaking at a Center for the New Economy conference in San Juan, Puerto Rico, Dudley said that growth will remain modest as the "temporary boost" from stimulus package and inventory boost fades away. He also added that he expects inflation to remain "well contained."
"Nonetheless, it's far too early to pop the champagne corks," he said. "While the U.S. economy is growing, unemployment remains unacceptably high and certain impediments could restrict growth in the near term."
Dudley did express optimism about economic recovery, however, stating that the duration of the downturn in GDP (1.5 years) was much shorter than a typical downturn in a banking crisis, and that the decline in output (four percent) was less than half the typical decline seen in past financial crisis.
The New York chief also stressed that policymakers must find a way to address troubled bank assets damaged by the rise in residential mortgage defaults.
"Finding ways to address problem assets and the health of the exposed banks is fundamental to restoring the banking industry to the firm footing that is needed to properly support economic growth," he said.
He added, "A healthy banking sector is crucial for economic growth because banks and other parts of the financial system play a key role in determining how savings are allocated among competing projects and users of credit. If households and businesses cannot get credit on reasonable terms, then the economy sputters."
Dudley also discussed regulatory reform, stressing that Congress needs to enact programs that will allow large, failing banks to be wound down with no adverse economic consequences. He added that higher capital requirements for banks, larger liquidity buffers and consistent compensation practices must be implemented in order to make the financial system "more resilient and robust."
"It's a long list-there is no single silver bullet-and it will take time, but the regulatory community and the political leadership will fail to meet our shared responsibility as stewards if we do not implement the necessary reforms in a timely and effective manner," he said.
Dudley did not discuss the Fed's Thursday decision to raise the discount rate from 0.5 percent to 0.75 percent. The central bank raised the rate due to what it said was a "continued improvement in financial market conditions."
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