william c dudley : us monetary policy and its global implications remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the central bank of the united arab emirates, abu dhabi, 13 november 2014. * * * it is a pleasure to have the opportunity to speak with you here today. in my remarks, i will assess the outlook for the u. s. economy and the progress that the federal reserve has made toward its dual mandate objectives of maximum employment in the context of price stability. i will argue that we are now closer to achieving these objectives. that is the reason why the federal open market committee ( fomc ) ended its latest treasury and agency mbs asset purchase program last month. but we still have further to go. although the u. s. labor market has shown substantial improvement, there still is a meaningful gap between where we are and full employment. also, inflation continues to undershoot the fomc ’ s 2 percent objective. this argues for patience with respect to the timing of lift - off of the federal funds rate and the beginning of the normalization of monetary policy. although patience is appropriate, if all goes well, i anticipate that we will begin to raise short - term rates sometime next year. that would be a welcome development, because it would indicate that the u. s. economy has largely recovered from the damage caused by the housing boom and bust, and the financial crisis. however, we need to be mindful that this shift in policy most likely will be accompanied by some degree of market turbulence. moreover, the normalization of u. s. monetary policy could create significant challenges for those emerging market economies ( emes ) that have been the recipients of large capital inflows in recent years. this leads to an important question : what can the federal reserve do to address these risks? i will make three observations about the potential international spillovers from normalizing u. s. monetary policy. first, what we may see in terms of market strains and macroeconomic adjustment during this normalization process will not be new. changes in fed policy, and especially the tightening of monetary policy, have often created challenges for countries abroad, especially emes. second, these emes, as a group, are better equipped today to handle those challenges than in the past. this reflects the fundamental improvements and stronger policy frameworks that many of these countries have put in place over the past 15 years. third,

given the dollar ’ s role as the global reserve currency, the federal reserve has a special responsibility to manage u. s. monetary policy appropriately in order to promote global financial stability. as always, what i have to say today reflects my own views and not necessarily those of the fomc or the federal reserve system. 1 the u. s. economic outlook and the implications for monetary policy since the official end of the great recession more than five years ago, the u. s. economy has grown at a disappointing 2. 3 percent annualized rate. several times over that period, it appeared that growth was breaking out on the upside and forecasts were raised, but each time such hopes were disappointed. we are again at a similar junction. over the past two quarters, the pace of economic growth has picked up. in particular, real gdp rose at a agria sbordone, thomas klitgaard, jonathan mccarthy and joseph tracy assisted in preparing this speech. bis central bankers ’ speeches 3. 5 percent annual rate last quarter, and is widely expected to grow at around a 2½ to 3 percent annual rate through the end of 2015. this time, however, i believe that we are less likely to be disappointed. that is because several of the various “ headwinds ” that have impeded u. s. economic activity in recent years have subsided. this allows the improving underlying fundamentals to exert themselves more forcefully. for example, fiscal restraint, which had a significant impact on economic growth last year, has abated, and is likely to disappear altogether next year. credit availability has also improved, reflecting healthier bank balance sheets and improving job and income prospects for potential borrowers. in addition, the excess supply of housing that built up during the boom of the previous decade has been worked off. this lessening of headwinds has allowed supportive financial market conditions spurred, in part, by very accommodative monetary policy to shine through. as a result, i expect that both consumption and business investment spending will strengthen over the next few quarters. on the consumer side, household balance sheets are now healthier, reflecting higher aggregate household net worth relative to income and less leverage. also, sturdy employment gains and falling energy prices are boosting real income growth. together with accommodative financial conditions, this should lend support to further gains in consumer spending. similarly, despite some recent market turbulence, conditions on the business side are supportive to sustained gains in investment.