william c dudley : the recovery and monetary policy 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 ), at the national association for business economics annual meeting, new york city, 15 october 2012. * * * good morning. it is a pleasure to have the opportunity to speak at this nabe ( national association for business economics ) conference today. having spent more than 20 years as a business economist working in the private sector before joining the federal reserve bank of new york in 2007, i feel right at home here today. my remarks will focus on the economic outlook. i do this with some trepidation, of course. in the private sector there are two adages about forecasting that underscore the need to be humble in this endeavor : first, forecast often. second, specify a level or a time horizon, but never specify both, together. but more seriously, despite the difficulties in making accurate forecasts, we still need to understand as best we can why the economy is performing the way it is, what that implies about the economic outlook, and, how policymakers can respond to generate better outcomes. we live in a highly complex and uncertain world, but we need to make as much sense out of it as possible. as always, what i have to say reflects my own views and not necessarily those of the fomc ( federal open market committee ) or the federal reserve system. my attention today will be on three important questions : • why has the u. s. recovery been so sluggish and consistently weaker than expected? • what should we, as monetary policymakers, do it about it? • what other policy actions are needed to help ensure a timely transition to strong and sustainable growth? the disappointing recovery turning to the first question, u. s. economic growth has been quite sluggish in recent years. for example, annualized real gdp ( gross domestic product ) growth has averaged only about 2. 2 percent since the end of the recession in 2009. as a consequence, we have seen only modest improvement in the u. s. labor market. not only has growth been slow, it has also been disappointing relative to the forecasters ’ expectations. for example, the blue chip consensus have been persistently too optimistic in recent years. this is illustrated in exhibit 1 which shows how private sector forecasts for 2008 through 2013 have evolved over

connection between independence and monetary stability. many empirical studies demonstrate that central bank independence allows the monetary authority to pursue price stability more diligently, resulting in lower and less variable inflation. in brief ( with respect to maintaining the intrinsic value of money ) : institutions – in other words, independent central banks – are of key importance. hence, central bank independence is an essential requirement for monetary stability. therefore, all countries wishing to join the european monetary union are required to ensure the compatibility of national legislation – including the statutes of their national central banks – with both the treaty and the statute of the escb. this particularly applies to central bank independence. however, independent monetary policy alone cannot adequately ensure a currency ’ s intrinsic value in the long run. as a general principle, a stability - oriented monetary policy must be accompanied by a stability - oriented fiscal policy. the reason for this nexus is that unsound fiscal policies generally entail the risk of a conflict between monetary and budget policy. given high levels of public debt and associated high interest rate expenses, it cannot be ruled out that politicians will tend to exert pressure on the central bank in order to make it lower the real burden of public debt by easing monetary policy and, thus, allowing inflation to rise. although, in general, central bank independence countervails undue political influence, it does not itself solve the potential for conflict which can harm the credibility of monetary policy. consequently, fiscal discipline is not only a complementary condition of monetary stability, but also of overall macroeconomic stability. given the potential problems associated with fiscal imbalances, the avoidance of excessive deficits represents an essential prerequisite for the maintenance of fiscal policies conducive to monetary and overall macroeconomic stability. the need for sound fiscal policies is especially evident in a monetary union if negative spill - over effects from one member state ’ s budget to the rest of the union are to be avoided. this is the rationale behind the existence of the excessive deficit procedure – laid down in the treaty establishing the european community and further clarified in the stability and growth pact ( sgp ) – which aims to limit the risks to price stability that might otherwise arise from national fiscal policies. finally, having outlined the importance of sound fiscal policies, i would like to emphasise that central bank independence contributes most effectively to monetary stability when it is supported by an overall stability consensus among the general public. this has been the case in germany for many decades. political attempts to undermine the bundesbank