william c dudley : job polarization in the region remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the quarterly regional economic press briefing, new york, 30 may 2012. * * * good afternoon and welcome once again to the new york fed ’ s quarterly regional economic press briefing. i am pleased to have this opportunity to talk with the journalists covering our region – and through you, to the people in our district. this morning i will focus on regional economic conditions, with particular attention to job polarization, which i would define as the expansion of the number of jobs at the upper and lower ends of the wage and skill distribution and a shrinking of job opportunities for those in the middle. we will see how these trends are playing out in our region. as always, what i have to say reflects my own views and not necessarily those of the federal open market committee ( fomc ) or the federal reserve system. national economic conditions the u. s. economy is continuing to slowly recover from the after - effects of the housing boom and bust and the financial crisis. but the recovery has been disappointing. indeed, when we look back at economic forecasts made over the past three or four years it is notable that growth has systematically fallen short of both the federal reserve and private - sector forecasts. despite what has been an unusually accommodative monetary policy by historical standards, the economy has grown at only a 2. 1 percent pace over the last four quarters and the blue chip consensus forecast only anticipates a modest acceleration to a 2. 4 percent rate over the next four quarters. the headwinds retarding recovery are well known. consumers have been deleveraging in response to the large losses in wealth generated in large part by the collapse in home prices. housing activity remains depressed for many reasons. these include the large shadow inventory making its way through the foreclosure pipeline, tight underwriting standards for new mortgage origination, and the sharp slowdown in household formation. although the corporate sector as a whole is now reasonably healthy, there still is a significant constraint on the availability of credit to small business. fiscal policy has become restrictive as state and local governments have cut expenditures in response to revenue shortfalls ; and the uncertainty about how congress and the administration will address the 2013 federal “ fiscal cliff ” is likely to inhibit hiring and investment by business. global economic growth has slowed as european activity has stagnated

operate with significant slack. second, measures of underlying inflation show little upward pressure. in fact, one – the federal reserve bank of new york ’ s underlying inflation gauge – is turning down. this measure uses a very wide set of variables to forecast the underlying inflation trend. third, it is hard to be very concerned about inflation risks when the growth rate of nominal labor compensation is so low and stable. it is noteworthy to me that the employment cost index has risen only 2. 1 percent over the past four quarters and has shown no acceleration. fourth, inflation expectations remain well - anchored. this is critically important because inflation expectations are an important driver of actual inflation outcomes. taking into account the current stance of monetary policy, i anticipate that inflation will decline to slightly below our 2 percent long - run objective over the next few years. so what does this all imply for monetary policy? i currently anticipate that the federal reserve ’ s federal funds rate target will remain exceptionally low – that is at the current level – at least through late 2014. given our forecast of stable prices and a still slow path back to full employment, there is an argument for easing further. but, unfortunately, our tools have costs associated with them as well as benefits. thus, we must weigh these costs against the benefits of further action. as long as the u. s. economy continues to grow sufficiently fast to cut into the nation ’ s unused economic resources at a meaningful pace, i think the benefits from further action are unlikely to exceed the costs. but if the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing. under such circumstances, further balance sheet action might be called for. we could choose between further extension of the duration of the federal reserve ’ s existing treasury portfolio and another large - scale asset purchase program of treasuries or agency mortgage - backed securities. bis central bankers ’ speeches conversely, i would be willing to consider tightening policy at a somewhat earlier stage if growth strengthened sufficiently to materially improve the medium - term outlook and substantially reduce tail risks, or if there was evidence of a genuine threat to medium - term inflation, including a rise in inflation expectations. in such a case, i would anticipate that the first step would be to bring