William C Dudley: Regional and national economic conditions
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal
Reserve Bank of New York and Chairman of the Committee on the Global Financial System
(CGFS), before the Morris County Chamber of Commerce, Florham Park, New Jersey,
18 September 2012.
* * *
Good afternoon, I am pleased to be in northern New Jersey to address the 8th Morris County
Economic Development Corporation (MCEDC) Business Growth Forum - an annual event
organized by the Morris County Chamber of Commerce. It is always a pleasure to speak with
the business community and I thank you for inviting me here today.
I get out of my office in New York City regularly to inform myself - first-hand - about
economic conditions and challenges across the second Federal Reserve District. Each visit
within the region helps me to strengthen relationships with the diverse people of this District
and build a deeper understanding of the economic challenges that we face. Today, I want to
talk a bit about the Fed - what we do and why we do it. Then I'll provide some thoughts
about the national and local economic outlook. Normally in these regional outreach speeches
I say little about monetary policy. But since the Federal Reserve made some meaningful
decisions last week and it is important for people to understand the reasons and motivations
for our actions. I will conclude with a brief discussion of policy.
After that, I'll be happy to answer any questions you have about what the Fed does and why,
and about the economic outlook.
As always, what I have to say reflects my own views and not necessarily those of the Federal
Reserve System or the Federal Open Market Committee, also known as the FOMC.
What the new York Fed does
By way of introduction, I will briefly review what my colleagues and I do at the New York Fed.
The New York Fed is one of 12 regional Federal Reserve Banks that, together with the Board
of Governors in Washington D.C., make up the Federal Reserve System, our nation's central
bank.
The Federal Reserve is independent within government. By law, we are charged with
managing the nation's monetary policy - taking actions that raise or lower interest rates to
promote full employment and price stability. The Federal Reserve is also charged with
promoting financial stability, without which we cannot achieve our economic objectives. We
play an important role in the nation's payments and settlements system, which you might
think of as the plumbing of the financial system. And we have a specific mandate to promote
economic development in each of our regions.
As president of the New York Fed, I serve as the vice chair of the FOMC, the Federal
Reserve committee that meets eight times a year in Washington to set interest rates and
make other decisions about monetary policy. The members of this committee all strive to
achieve our statutory mandate. Sometimes we have different views on the specific policy
choices at hand, and you should view this as completely appropriate: these are hard
questions - particularly during difficult economic circumstances such as we face today.
In fact, I think we make better decisions as a committee because we don't all think alike. But
we are united in our commitment to our dual mandate of maximum sustainable employment
and price stability and in our belief that preserving the independence of the Federal Reserve
in making monetary policy decisions is very much in the public interest. That independence
allows us to make tough decisions based on data and analysis insulated from short-term
political pressures.
At FOMC meetings, each Committee member presents a current outlook for his or her region
and for the nation. In formulating these assessments, we consult with many sources - our
boards of directors, regional advisory councils, community leaders and other key
stakeholders. My meeting with you and others today is part of this systematic effort to
understand what is going on in the grassroots of our economy. To help me gather more
information about our region, I met this morning with Fox Valve, a small business in Dover
that manufactures specialized, highly engineered industrial parts. After that, I had the
pleasure of participating in a roundtable discussion with members of the local
MexicanAmerican business community. After this lunch, I will travel to Picatinny Arsenal to learn
about its role in the state's economic activity. I'll also meet with the leaders of New Jersey
Community Capital to learn about their cutting-edge programs for helping distressed
homeowners and then I'll speak to the students, faculty and alumni at Montclair State
University.
In addition, my colleagues and I at the New York Fed continually track conditions in our
District, and we have created a number of tools for that purpose. For example, my staff
produces indices of economic activity for New York City, New York State and New Jersey.
We also track local household credit conditions, including the amount and type of personal
debt and whether payments are being made in a timely way.
We also conduct a periodic poll about the credit needs of small businesses, which are an
important source of new jobs in the region. In our latest poll of several hundred firms, many
report that they did not apply for credit because they were "discouraged." Perhaps
surprisingly, many of these non-applicants have credit profiles similar to other firms who
successfully sought credit. This finding suggests that the demand for credit could pick up as
some "discouraged" firms learn that they might be able to obtain credit now.
If you, as a representative of a small business, would like to participate in our next poll,
please pass your card to my colleagues, who are in the audience, or see me after the speech
and we will be glad to add you as a respondent.
To promote economic development in our local communities, we publish a lot of data and
analysis on the local economy, including our small business poll findings. In addition we
provide education outreach initiatives to help small businesses. For example, in October, we
will host a workshop in Newark to help local businesses learn about export credit facilities
and new tools for marketing. At the same time, we will launch our annual financial awareness
video competition aimed at helping young adults make sound personal financial decisions.
As you know, even states as wealthy as New Jersey have large pockets of poverty. So, we
target some of our work specifically to low- and moderate-income groups.
We have worked hard to help neighborhoods that face high foreclosure rates. This work is
informed by analysis that suggests that high levels of foreclosures affect the value of
neighboring homes, the local tax base and economic vitality more broadly. We have provided
housing counselors and community development groups with the latest information on
mortgage conditions, via mortgage briefs, roundtables, presentations and newsletters -
including an interactive tool on our website that shows monthly delinquency and foreclosure
conditions at the local level. This fall we will host a conference on distressed residential real
estate to share what we and leading experts have learned with senior policymakers and
practitioners from across the United States.
All in all, there is a lot to keep myself and my colleagues busy.
Regional economic conditions
So how is our region doing? Let me start by saying that New Jersey is well-positioned to
prosper. New Jersey is the 11th largest state - with a population of 8.8 million and this
population is well-educated. Roughly 35 percent of adults over 24 years old have a college
degree, well over the national average. Here in Morris County, that figure is almost
50 percent. The state is also quite ethnically diverse: roughly 20 percent of New Jersey
residents were born abroad.
The state's economy is industrially diverse, resembling the nation. New Jersey employs
many people in healthcare, professional and business services, wholesale and retail trade,
and leisure and hospitality. In the northern part of the state, we see a disproportionate share
of jobs in a few industries: finance, particularly in Hudson County; goods distribution, related
to the ports, rail lines and trucking and warehousing activities that are prominent here;
pharmaceuticals manufacturing and R&D; and private education.
The area obviously benefits from its important links to New York City. In particular, many
residents of this area, including myself, commute each day to the city.
So how is the recovery proceeding here? Based on the New York Fed's indices, economic
activity in the state did not begin to recover until November 2010, more than a year after the
nation and New York City. Since then, activity has recovered at a moderate pace, although
we are still operating below our previous peak.
Employment in New Jersey declined substantially during the downturn. Our employers cut
about 250,000 jobs. This represents a 6 percent loss - roughly on par with the loss
nationwide. Less than one in four of those jobs have been recovered to date, slightly weaker
than the nationwide recovery and, of course, much weaker than I would like to see. Over the
past year, the private sector has seen moderate job gains led by some of the key sectors I
mentioned earlier, particularly professional and business services, education and health, and
leisure and hospitality. But the state continues to shed jobs in manufacturing and there has
been little recovery in construction. State and local government cut back employment
substantially during 2010, though there has been a modest pick up over the past year.
Unemployment among New Jersey residents remains high. July's reading of 9.8 percent puts
the state's rate well above the U.S. average.
More broadly, how are the state's families faring financially? While the median household
income among New Jersey families is the second highest in the nation - at about $69,400 -
roughly a tenth of residents live in families with incomes below the poverty line. Although this
rate is below the national rate of 14 percent, it varies considerably by county across the
state, and is particularly high in Essex, Hudson and Passaic counties. Reducing poverty is a
major challenge for policymakers.
The New York Fed's measures of regional credit conditions suggest continued financial
challenges for families here. As of the second quarter of 2012, for those people with a credit
report, average debt per person in New Jersey was about $63,000, roughly unchanged over
the past several years. Delinquency rates on that debt are high: 8.4 percent of all debt in the
state is seriously delinquent, up from 7.4 percent in 2011 and above the national rate of
6.7 percent. So, many New Jersey households are still struggling with their finances.
Although there are some recent signs that home prices in the state are starting to firm,
nevertheless, the housing crisis continues to take a toll on our homeowners. As of June,
9.3 percent of all mortgage debt in New Jersey was 90-plus days delinquent, three
percentage points above the national rate. And that delinquency rate is actually a little higher
here in northern New Jersey.
National economic conditions
The performance of the U.S. economy since the end of the recession in 2009 has been
disappointing. Real GDP has grown at an annual rate of just over 2 percent over this period,
and it was even slower in the first half of 2012. As a result, employment gains have been
modest, unemployment remains above 8 percent - an unacceptably high level - and
participation in the jobs market remains depressed. Moreover, about 5 million workers have
been unemployed for six months or more. This is important because long-term
unemployment can cause job skills to atrophy making it more difficult for such people to find
jobs in the future. While the good news is that the job-finding rates of the long-term
unemployed have not yet deteriorated as many feared, we ought not to take this for granted
going forward.
Although energy prices have begun to rise again, total inflation, as measured by
year-overyear changes of the Consumer Price Index, is still around 13⁄4 percent - less than half the
rate in September of 2011. In recent months, core inflation has also slowed and it is now also
under 2 percent.
Higher energy and grain prices mean that headline inflation will likely edge somewhat higher
for a few months before moving slightly lower again. But measures of the underlying rate of
inflation are moderate, wage gains remain subdued, and longer-term inflation expectations
are fully consistent with our longer run inflation objective of 2 per cent as measured by the
personal consumption expenditures (PCE) deflator. Near term, the economic outlook is that
the growth pace is likely to remain disappointing. On the positive side, motor vehicle sales in
August increased solidly. Nevertheless, retail sales outside of autos and gasoline were soft in
August as households continue to be cautious.
One brighter spot has been the housing market. Housing starts and sales of new and
existing single-family homes are trending up gradually. Nationally, home prices have
stabilized and begun to rise modestly after falling roughly 30 percent from their 2006 peak.
Housing market conditions still vary significantly across the country with the worst performing
counties experiencing annual house price declines of 8 percent or more. This sector is just
getting back on its feet, so that even strong gains in the residential investment sector from its
current tiny base will provide only a modest contribution to overall GDP growth. In addition,
homeowner net worth remains much below its pre-crisis level.
The near-term outlook for the business sector is particularly worrisome right now. New orders
for nondefense capital goods and information on business plans for spending on new
structures both suggest weakness in business fixed investment. Also, many indicators point
to sluggish manufacturing activity, including the ISM manufacturing composite index, several
regional manufacturing surveys, and August industrial production. Our own Empire State
Manufacturing Survey fell deeper into negative territory in September. This manufacturing
slowdown stems from several factors, including the slowdown in the pace of growth abroad
and uncertainties about how the fiscal cliff in Washington will be resolved.
So why has the economy grown so slowly since the official end of the "Great Recession?"
There are many reasons, but I would cite five factors as particularly important:
• Access to credit. Although credit availability is slowly improving, it remains impaired,
especially for households with less-than-sterling credit histories and for some small
businesses.
• Balance sheet repair. Although substantial progress has been made, many
households still need to rebuild their net worth following the housing bust. More than
20 percent of homeowners with a mortgage are "underwater" - meaning they owe
more on their home than it can be sold for.
• Fiscal drag. State and local governments have been cutting spending for over two
and half years and federal government spending is also contracting. While fiscal
consolidation is essential over the medium to long term, spending cuts reduce
demand and are a drag on near-term growth.
• Risks relating to Europe. The crisis in the euro area has reduced the demand for
U.S. exports and weighed on financial markets.
• Fiscal uncertainty at home. Families and firms face elevated uncertainty relating to
future taxes and government spending, in particular from the so-called "fiscal cliff" -
the prospect of sharp increases in taxes and cuts in spending at the start of 2013 if
Congress and the White House cannot agree on an alternative fiscal plan.
Given the signs of improvement in some of these areas, including the slow but steady
progress in healing balance sheets and restoring the supply of credit, I anticipate that the
pace of economic growth will gradually pick up, supported by very low interest rates. But
heading into the FOMC meeting last week, I judged that, if we did not ease monetary policy
further, the pace of improvement would be unacceptably slow.
Monetary policy
Last week the FOMC took additional action to promote a more robust recovery in a context of
price stability. In order to ease policy, the FOMC deployed two complementary tools: asset
purchases and forward guidance on interest rates. With respect to asset purchases, the
Committee said it would start buying additional mortgage-backed securities at a rate of
$40 billion a month. In terms of rate guidance, the Committee said it anticipated that
exceptionally low levels for the federal funds rate would likely be warranted "at least through
mid-2015."
As Chairman Bernanke explained in the press conference that followed the meeting, the
Committee also took two steps to underscore its commitment to ongoing support for the
recovery. First, the Committee said that if it did not see substantial improvement in the
outlook for the labor market, it will continue the MBS purchase program, undertake additional
asset purchases and employ its other policy tools as appropriate until it does. Second, the
Committee emphasized that it expects that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the economic recovery
strengthens.
As usual, the Committee will publish minutes of the meeting three weeks after it took place.
In the interim, however, I thought it might be useful to provide my own perspective on these
actions.
In my view, the decision to ease policy further is fully consistent with our dual mandate and
policy framework. As I mentioned earlier, we have two goals - to promote maximum
employment and price stability. We therefore seek to minimize how far employment is from
its long run normal level and inflation is from our longer-run goal of 2 percent on the PCE
measure. Because monetary policy works with a time lag, we base policy not just on where
the economy is today but where we expect it to be in the future. To do this, we make
economic forecasts, based on data and insights from a broad range of economic models. We
also take into account the balance of risks around our base case outlook.
Looking ahead, in the absence of further monetary easing, I concluded that growth would
remain too subdued over the next several years to make big inroads into the spare capacity
that remains from the Great Recession. As a result, unemployment would remain
unacceptably high, with economic risks skewed to the downside. Meanwhile, with substantial
slack in labor markets and inflation expectations stable, inflation was likely to remain a bit
below our 2 per cent longer-run objective.
In this situation, I concluded that our policy framework means that further monetary policy
easing was appropriate provided that the benefits of using the tools available outweighed the
costs. In my judgment, this standard has been satisfied here. I am confident that the costs
are manageable, based in part on the experience we have of using the tools these past four
years and that the benefits substantially exceed the costs, recognizing, of course, that our
actions are not so powerful that they will instantly transform the economic outlook.
So how do our actions support economic activity? Buying assets and extending interest rate
guidance puts downward pressure on longer-term interest rates, so they are lower than they
would otherwise be for any given economic outlook. This supports the price of assets such
as equities and homes. Buying mortgage-backed securities has the additional effect of
narrowing the interest rate spread between these assets and Treasuries, which further
reduces mortgage rates. Moreover, to the extent that our actions are seen as supporting the
recovery and providing some insurance against adverse shocks, confidence in the
mediumterm economic outlook should also increase, making businesses and households more
willing to invest, hire and spend. If we are successful, long-term Treasury yields could
actually rise as confidence in a sustainable recovery increases. At the same time, the
expected returns on private assets should rise and risk premia decline. This matters because
such shifts would provide support to the economic recovery.
Now it is true that some of the channels through which monetary policy affects the economy
may be partially impaired at the moment. For example, because of ongoing restrictions in the
supply of mortgage credit to customers with less than perfect credit records, the impact of
lower mortgage rates on housing is probably less powerful than normal. While this restraint
should slowly ease as house prices stabilize, the difficulties of households with lower credit
scores in obtaining mortgage credit warrants ongoing attention. However, it is also worth
noting other channels through which monetary policy affects economic activity are not
impaired, including the impact on spending that is generated by rising wealth, declining risk
premia and improving confidence.
It is important to recognize that our tools are not all-powerful - monetary policy is not a
panacea for all that ails our economy. But, at the margin, firms facing lower borrowing costs
for any given economic outlook will invest and hire more. People who refinance at lower
rates, or see the value of their homes and 401K pension plans go up, will spend more. I
believe that a nudge in the right direction will move us closer to a self-reinforcing cycle of
more hiring, more spending, more growth, and more investment. This is the type of virtuous
cycle that we should seek and one that is consistent with a self-sustaining and improving
economy.
I believe our latest statement provides greater clarity about how we intend to use the tools
we have to promote our statutory objectives. As Chairman Bernanke said at his press
conference, the idea is to make it "more explicit, more transparent to the public, make it more
obvious that the Fed will do what's needed to provide the support for the economy."
In particular, the amount of asset purchases that we undertake will be a function of how the
economy evolves. If the economy is weaker, we'll do more. If the economy is stronger, and
we see a substantial improvement in the outlook for the labor market sooner, we'll end up
doing less. From my perspective, linking our purchases more closely to economic outcomes
underlines our determination to generate the kind of recovery that will deliver more rapid
progress toward maximum employment in the context of price stability.
So what does "substantial improvement in the outlook for the labor market" mean to me?
Note that I will be focusing on the outlook, not just the current state of labor market
conditions. In that context, it wouldn't be enough for me just to see the unemployment rate
decline a bit. It would also matter why the unemployment rate is declining and whether that
improvement is likely to be sustained in the future. For example, higher payroll growth that
was not supported by stronger economic growth, or falling unemployment rates that were
due mainly to declining participation in the labor market, would not likely meet my test.
Therefore, to gauge how substantial the improvement in the outlook for the labor market is, I
will be looking at a range of indicators, including the unemployment rate, payrolls, the
participation rate, the employment to population ratio and job finding rates, as well as the
growth momentum within the economy.
As we approach year-end, the maturity extension program in which we are increasing our
holdings of long-dated Treasuries will be coming to an end. I'll be taking stock on how we are
doing with respect to our employment and inflation goals and whether it will be appropriate to
continue purchasing longer-dated Treasuries when that program concludes. I think that this
will depend on whether we have seen a substantial improvement in the labor market outlook
in the interim and any further evidence about the costs and benefits of continuing such
purchases.
In terms of our monetary policy regime, the FOMC statement noted that the Committee
expects to maintain a highly accommodative stance of monetary policy "for a considerable
time after the economic recovery strengthens." This is important because in situations such
as the one we find ourselves in today, when monetary policy is somewhat constrained
because we cannot lower the federal funds rate below zero, one of the most powerful things
a central bank can do is to provide guidance as to how it will behave in the future. In this
respect, I am pleased that we have drawn a sharper distinction between what we expect the
economy to look like in a few years time and how we expect to set policy based on that
outlook.
In particular, when the Committee extended the period for which it anticipates keeping the
federal funds rate at exceptionally low levels - which I interpret to mean the current range of
zero to 25 basis points - to "at least through mid-2015," I don't think this was due to greater
pessimism about the economic outlook. In fact, when you look at the September Summary of
Economic Projections of the Committee members - the medium-term growth outlook was
upgraded a bit relative to prior July projections. In my judgment, combining the statement
and our projections, the proper inference is that we were acting to secure a better outcome -
more rapid progress toward full employment and price stability.
Conclusion
To sum up, too many people remain without the jobs that they need to help support their
families and themselves, and while the economic expansion is continuing, we aren't yet
growing fast enough to put back to work many of the idle workers and business facilities that
represent the productive potential of our economy. Meanwhile analysis of the inflation
outlook suggests that price increases are likely to be close to our 2 per cent longer run
objective over the coming years.
Not all of the factors that are holding back growth are directly amenable to monetary policy.
Our nation's economic challenges cannot be solved and our economic fortunes restored by
the Federal Reserve alone. Others - notably the next Congress and White House - will have
to step up to the plate.
But I am confident that the Fed will promote maximum employment and price stability to the
greatest extent our tools permit, and we will stay the course. We are setting policy to achieve
a stronger recovery in the context of price stability. When that finally materializes, I'll view it
as consistent with the result we are trying to achieve, and not a reason to pull back our
policies prematurely. If you're trying to get a car moving that is stuck in the mud, you don't
stop pushing the moment the wheels start turning - you keep pushing until the car is rolling
and is clearly free.
Thank you for your kind attention. I would be happy to take a few questions.