The president of the Federal Reserve Bank of New York painted a mixed picture of the economic recovery on Oct. 5, saying it will be moderate at best by historical standards.
Speaking in the McNally Amphitheatre on the Lincoln Center campus, William C. Dudley cited the nation’s high unemployment as a major drag on the chances for a speedy and robust recovery.
“On the positive side, the financial markets are performing better and the economy is now recovering,” Dudley told a packed room of 300 faculty, students and members of the Federal Reserve. “On the negative side, the unemployment rate is much too high and it seems likely the recovery will be less than robust. This means the economy has significant excess slack and implies that we face meaningful downside risks to inflation.”
Historically speaking, the current unemployment level of 9.8 percent is much worse than it appears, Dudley said, because prime-age male unemployment is at a record level of 10.4 percent, and looks as if it will remain high.
In all of the past post-World War II recoveries, the unemployment rate of that particular cohort has remained at, or quickly dropped to, 6 percent or below, he said.
In addition, Dudley saw three major factors restraining the pace of the recovery:
– Households have not yet adjusted to the “net wealth shock” caused by the sharp housing decline. Therefore, he expects Americans will need to save more and to retire later—both bad trends for the economy.
– The fiscal stimulus has led to positive economic activity, but it is only a temporary activity.
– The banking system has not fully recovered, and will most likely suffer from an impending decline in commercial real estate valuations and the collapse of small businesses.
Dudley said interest rates would likely stay low and defended the Federal Reserve’s decision to keep the nation’s biggest banks solvent by purchasing troubled assets. Over the past year, the Federal Reserve’s balance sheet has ballooned from $900 billion to about $2.15 trillion. It currently owns about $700 billion in agency mortgage-backed securities. Dudley said that, if necessary, those excess reserves could be “mopped up” by asset sales.
Nevertheless, Dudley called the near-collapse of the nation’s banks “wholly unsatisfactory.”
“[Our] regulatory policies and practices need to be recalibrated to address the shortcomings of our financial system,” he said.
Dudley, a former partner and managing director at Goldman Sachs, achieved a distinguished career in the public and private sectors before becoming the 10th president of the Federal Reserve last January. His appearance at Fordham was sponsored by the Fordham Corporate Law Center.