Thursday, January 14, 2010

Nightly Business Report's Exclusive Interview with N.Y. Fed President: "No Interest Rate Move for at Least Six Months"

Our long time readers know I've been at the market my entire adult life. In all that time I can't recall a Fed official being as frank and straightforward as William Dudley is in this exclusive NBR interview with Susie Gharib.
As President of the N.Y. Fed Mr. Dudley also serves as Vice-Chairman of The Federal Reserve's Open Market Committee.

I don't have much access to the corridors of power so I try to emulate the sentiment expressed by a smart guy:
"All which a man without authority can give--His unbiased opinion,
his honest advice, and his best reasons."

-Edmund Burke (1791)

My advice: read the transcript.
From PBS's Nightly Business Report:

New York Federal Reserve, President, William Dudley Offers His Economic Outlook

SUSIE GHARIB: We could be saying good bye to the Fed's 0 percent interest rate policy as early as this summer. That's what the president of the New York Federal Reserve William Dudley told NIGHTLY BUSINESS REPORT today in an exclusive interview.

TOM HUDSON: Susie, this is big news. The central bank's key rate has been at 0 percent since way back in December of 2008. Today, Dudley saying the policy makers could begin to move rates higher as early as quote, six months from now.

GHARIB: That's right Tom. What Dudley says is important for the markets and for American consumers. Earlier today I interviewed him at his office. I started with topic A for all Americans: jobs. I asked him what kind of economic recovery are we having if people can't find work.

WILLIAM DUDLEY, PRESIDENT, FEDERAL RESERVE BANK NEW YORK: We are getting economic growth. I think that's going to start translating to employment gains relatively soon within a few months. If you look at the initial unemployment claim statistics, they've come down dramatically. What we haven't seen yet, though is improvement in the number of people that are actually being hired. So that's really the next phase. So I think we'll definitely see job growth in 2010. Whether it will be sufficient to bring down the unemployment rate materially, remains to be seen.

GHARIB: So what do you think is holding the economy back? What's the obstacles to growth?

DUDLEY: Two things have happened. One there's been a huge decline in home prices and a decline in equity prices. There have been some recovery, but if you look over the last few years, equity prices are much lower now than they were three or four years ago. So that's been a big blow to household wealth. Problem number two is what's happening in the banking sector. The banking sector, banks are failing because of losses in the commercial real estate, on credit cards. So there's a lot for the banks to do and they don't really have the capacity to supply as much credit to the economy as it needs right now.

GHARIB: Let's talk a little bit more about lending, because we do stories on this every day. It's tough for consumers and businesses to get a loan. Is there anything more the Fed can do?

DUDLEY: I don't think we have the tools in place to sort of force a bank to give a loan to an individual borrower. But what we can do is make sure that banks have enough capital, that interest rates are low and affordable and then I think part of it is just a healing process. It can take some time.

GHARIB: So if the recovery is so slow going, what does this mean for interest rates?

DUDLEY: If you look at the last Federal market committee meeting, we said we would keep short-term rates low, exceptionally low for an extended period. So until we change that, that's where we are.

GHARIB: Bill, everybody wants to know what do you mean by extended period? Would you please define that for us?

DUDLEY: I actually did take a formal poll, because I also wanted to answer the same question myself, because obviously we're using this language, what does this language mean to people? And among my very informal set of people that I asked that question, they said that extended in their mind means at least six months.

GHARIB: So you would see that you could begin, you would begin to vote for a rate hike in like June?

DUDLEY: No, no, at least six months. So what I want to stress is extended means at least six months. It could be a year from now, two years from now. It's going to depend on how the economy develops.

GHARIB: What do you need to see happen in the economy for you to feel comfortable about voting for a rate hike?

DUDLEY: I certainly need to see an economy that's vigorous enough to bring the unemployment rate down, number one. And two, I would care about what's going on in inflation. We have a dual mandate, price stability, full employment. We're doing very well on the inflation side. We're doing not well at all on the employment side. So really we have an imbalance right now. So what I'd be really looking for is to watch job growth, unemployment rate coming down, and as long as inflation is well behaved, then I'm going to be pretty patient on the other side.

GHARIB: I don't know if you've seen the latest economy of "The Economist," the headline says bubble warning and it says that if we keep rates too low for too long there's a danger that we could have another asset bubble, another financial crisis. How worried are you about that happening again?>>>MORE

The transcript linked above is the part of the interview that was broadcast. The complete interview is a half hour long and is transcribed in this 12 page PDF.

The complete video (26:47) is available on NBR's homepage.

In addition to headquartering the Second District of the Federal Reserve System, the New York Fed implements monetary policy via its open market operations.

This is as close to those "corridors of power" as most of us are likely to get.